If you don’t know it yet you should know that have credit cards can be good for your credit score if you are responsible with them. However, maybe you have too many of them to keep up with or maybe you just want to get rid of one just because or better yet because you found a better one with lower fees or better incentives. Should you close some of your credit cards to help with your credit score? Are you sick and tired of having dozens of credits cards? Before you do anything you need to understand exactly what happens to your credit when you close one of your accounts.
If you’re closing an account to improve your credit you need to think again. Your intentions might be good, but in reality when you close a credit card account it can actually hurt your credit score in the short term more than anything else. What? Close a credit card account and hurt my credit? How is that possible? Well, it has to do with how your credit score is calculated.
How is my credit score calculated?
To keep it simple, let’s talk about some of the main things that make up your credit score. They are:
1- The length of time available for your credit history (The longer you’ve been good about your credit the better)
2- The different types of “credits” you have (paying your utility bills, paying for rent, your mortgage, credit cards)
3- How much credit you’re using AND the percentage of your total credit that usage is (This one is important when you’re closing your credit card account)
So what happens when you close that credit card account? Let’s look at an example. Let’s say that you have 5 credit cards for a total of $10,000 in credit. Each month you have about $2,000 in debt on these cards (which you pay in full each month because you’re smart!) What you’re using is 20% of your total allotted credit from all your cards($2,000 is 20% of your total $10,000 in credit). The “experts” say that you want to keep the percentage of credit that you use under 30%, and if you can keep it under 20% then even better.
So what happens when you get rid of one of those 5 cards? Let’s say you get rid of one of them that had a $5,000 credit allowance. Now your total available credit from the remaining 4 cards is $5,000 ($10,000 total – $5,000 card that you got rid of). So what happens now is that you’re using 40% of your allotted credit instead of 20% because your total available credit went down ($2,000 is 40% of $5,000).
What does this do? This lowers your credit score! You will look like a “riskier” candidate to the banks because of the simple fact that you’re using a higher percentage of your total available credit. So you see, you need to be careful before you decide to close a credit card account. Sometimes though you have to do it for whatever reason. If that’s the case then you need to try and do it wisely.
How to properly close a credit card account
If you’ve decided that you just have to close some of your credit card accounts then just be sure to think a bit before you act. It could be the difference in you getting that loan for your new house or not.
1- Don’t close more than once account at a time. It can really hurt your credit score if you drastically drop you total credit allotment all at once. Instead, you should gradually get rid of the cards you don’t want. It would be smart to get rid of the cards that are costing you the most money in fees first. Try to keep the cards that are benefiting you with good cash back and incentives.
2- on that same note, Don’t close all your credit card accounts! Doing this might make it much harder for you to get credit in the future, not to mention that it can really damage your credit score! Don’t do it! Instead, you need to keep some of your cards and try to pay them off in full each month so you can raise your credit score.
3- If for nothing else you need to keep your credit cards in case of an emergency. You never know when you might need some extra money for an unplanned repaid or health care bill. Nobody likes to think about it, but bad things do happen sometimes.
I was once on vacation in the Bahamas when my mother had a horrific accident. She was taken to the hospital there, but we had to fly her to the US so she could get the care that she needed. In order to do that we needed money to get her on a medical plane from the Bahamas to Miami. My parents had to max out their credit cards and then they needed to borrow mine to help pay for the costs. Having that Visa or Mastercard can literally be a lifesaver.
4- If you do decide to close an account you need to be sure to pay off all your debt on the account before you close it. I hope that goes without saying for you, but it is important to do that. Also, if you’re closing an account because you want to get rid of the late payment history that you have on that account you should know that your payment history on your closed accounts will still be factored into your credit score even years later. (I’ve found that it could be factored into your credit score up to 7-10 years later) So if you’re closing those credit card accounts you went wild with in college, great, but just know that it will take a while before that late payment history damage to your credit score is gone.
When you do close your account you need to follow up with your card issuer to make sure the account was closed. You need to let them know that you want your records to show that you requested to have the account closed yourself. Writing them an email is a good way to do it as that is a good way to have written proof that you requested the closing of the account and that it wasn’t closed by them for some other (bad) reason. Then, it’s very important that you follow up and check your credit report with the three bureaus to make sure everything went through correctly.