If you no longer intend to use a credit card, your first instinct may be to close the credit card account completely. After all, closing the account would ensure that no one else would be able to use the account fraudulently and statements for the account would stop coming in the mail. The thought that closing a credit card would have a future financial impact might never cross your mind. It is important to understand what the financial consequences of closing a credit card may be before making the decision to close the account.
Lower Credit Score For Higher Credit Utilization Rate
When you close a credit card, the credit limit of that card is removed from the amount of credit that you have available when your credit score is calculated. If you have other debt, this could increase the ratio of amount of credit used to amount of credit available for use. Your credit utilization rate accounts for 30 percent of your FICO credit score and a higher credit utilization rate translates into a lower credit score. Individuals with the highest credit score typically have a credit utilization rate of less than 20 percent.
Lower Credit Score For Shorter Credit History
If the credit card that you close is one that you have held for a long time, it may negatively affect your credit score when the account history for that credit card falls off of your credit history. The length of your credit history accounts for 15 percent of your credit score calculation and if the credit cards you continue to hold are much newer than the account that you have closed, your credit score could drop by a significant amount. If the credit card you are considering closing has been open for a long time, you may be better off leaving the account open and keeping the credit card in a secure place.
Affecting Your Mix Of Credit
Another financial consequence of closing a credit card account is that it can affect the mix of credit in your credit history and lower your credit score. When your credit score is calculated, the mix of credit types in your credit history is taken into account and accounts for 10 percent of your overall credit score. Lenders want to see that you can handle both revolving and non-revolving debt equally well. If the credit card you are closing is your only credit card, your credit score may suffer because of it.
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