Will Closing Credit Cards Improve or Lower Credit Scores
Generally speaking, closing credit cards may lower your credit score.
This is because each time you close a credit card account, it increases your balance-to-limit ratio. This is usually viewed as a risk by lenders. If your credit card account has a zero balance, it actually helps your overall credit score to remain open. Additionally, you never know when a true emergency will happen. It doesn’t hurt to have a completely open card with no balance for just such a situation. You can also request a credit limit increase on another card to help offset the balance-to-limit ratio of closing a different credit card account.
If you do not plan on making a large purchase on credit, then it may be fine to go ahead and close a credit card account. Closing a credit card account may lower your credit, but it will eventually even out.
You may want to still consider closing a credit card account if you are paying higher fees on it and can reasonably pay balances on other cards. You will also want to think about this for cards you don’t use but are still paying annual fees on.
Additionally, some people will want to consider canceling any unneeded credit cards if they truly cannot control their spending. We all have addictions or things that test our will power. If yours is spending, you may want to try and limit the avenues of surplus credit available to you.
You might be wondering what a Balance-to-limit ratio is at this point.
A balance-to-ratio limit is the amount or percentage of credit being used compared to the credit still available. The lower your ratio is, the better it is. For example, if someone has a credit card with a $5,000 limit but only has a balance of $500, their balance-to-limit ratio would be .10 as they are only using 10 percent of the credit available to them.
Let’s say this person also had a second credit card with a $5,000 limit but no balance. This would now put their balance-to-limit ratio at .05 as they’re now only using 5 percent of the total available credit. The reason canceling a card can hurt your ratio is because it takes away available credit, driving up your overall ratio score.
Unfortunately, it is difficult to know exactly how much or how little effect closing a credit card account will have for each individual.
The age of your overall credit history (not your actual age) can play a large role in the effect closing a credit card account might have. Older card accounts may have a more negative effect when closed than newer ones. The period of positive credit history will be more impactful. It can help to check into replacing credit cards with others that may have better terms. If your credit is already in good standing, the closing of a credit card account should have minimal impact and whatever impact it does should not last very long.
Ultimately, responsible spending and staying on top of your credit will play the biggest role. Make sure to always be vigilant on your balance-to-limit ratio and order your credit score if need be.
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