Closing A Credit Card Account Can Wreck Your Credit Rating

Every day, commercials warn us of the dangers of losing a good credit rating. We are told that our credit rating could be the most important number we have and that it should be monitored and protected at all costs. People typically do all that they can to keep their credit rating as high as possible, including making sure that all of their bills are paid on time and refraining from maxing out their credit accounts. However, many people do not know of one thing that could wreck their credit rating in a single action – closing a credit card account.

How Closing An Account Affects Your Credit Rating

Closing a credit card account seems like a harmless action. After all, if you are not using it, why leave it open for hackers to access and criminals to steal? Closing the account may seem like a no-brainer if it hasn’t been used for several years, yet the closing of the account could have a dramatic effect on your credit rating due to the way these ratings are calculated.

A portion of the credit rating calculation involves the ratio of the credit being used by the consumer versus the amount of credit currently available to the consumer. Consumers that use a low percentage of their available credit receive a higher credit rating than consumers that use a high percentage of their available credit. This ratio fluctuates all the time with purchases made and payments sent.

The problem with closing a credit card account arises when it reduces your available credit by a considerable amount. For example, if you have two credit card accounts with $5,000 limits and you have a balance of $2,000 on one of them, you are effectively using 20 percent of your available credit, a level that creditors like to see. However, if you close the credit card account you are not using, you are now using 40 percent of your available credit and your credit rating will reflect that with a lower rating.

The Solution

If you have a credit card account that you have held for a long time, but are not currently using, lock it away in a secure place instead of closing out the account. You can ensure that the account is not be used by criminals by checking your credit report regularly for unauthorized purchases and fraudulent account information. The only exception to this rule is when the credit card issuer is charging you maintenance fees for keeping the account open. If this is the case, try to open a new credit card with a similar limit and no additional fees, which should be no problem if you currently have a good credit rating.