How Closing Credit Cards Affects Your Credit Score: Myths and Facts

 

Introduction 

Closing credit cards can be a daunting task for many individuals who are concerned about their credit scores. However, it's essential to understand the myths and facts associated with closing credit cards to make an informed decision. In this article, we will discuss how closing credit cards affects your credit score, the myths and facts associated with it, and provide tips on how to minimize any negative impact.

The Basics of Credit Scores

Before we delve into the impact of closing credit cards on your credit score, let's discuss the basics of credit scores. Credit scores are three-digit numbers that range from 300 to 850 and are based on your credit history. The higher your credit score, the better your creditworthiness is perceived by lenders.

Your credit score is calculated based on several factors, including your payment history, credit utilization, length of credit history, and credit mix. Payment history and credit utilization are the two most critical factors in determining your credit score, accounting for 35% and 30% of your score, respectively.

 

 

How Closing Credit Cards Affects Your Credit Score

Many individuals believe that closing credit cards can significantly harm their credit scores. However, this is not always the case. Here are some myths and facts associated with closing credit cards:

Myth: Closing a Credit Card Will Automatically Lower Your Credit Score

Fact: Closing a credit card can lower your credit score, but not always. It depends on your credit utilization ratio, which is the amount of credit you're using compared to your credit limit.

For example, let's say you have two credit cards, each with a $5,000 limit. You currently have a $2,000 balance on Card A and a $3,000 balance on Card B. Your total credit limit is $10,000, and your total balance is $5,000, which means your credit utilization ratio is 50%. Now, if you close Card B, your credit utilization ratio will increase to 67%, which could lower your credit score.

 

 

Myth: It's Better to Keep Credit Cards Open, Even If You're Not Using Them

Fact: It's not always better to keep credit cards open, even if you're not using them. If you have a high credit limit and several credit cards that you're not using, it can negatively impact your credit score. Lenders may see this as a potential risk, and it could impact your ability to get approved for credit in the future.

Myth: Closing Credit Cards Will Erase Your Credit History

Fact: Closing credit cards will not erase your credit history. Closed accounts remain on your credit report for up to 10 years, and they continue to impact your credit score during that time. However, closed accounts do not contribute to your credit utilization ratio, which can impact your credit score.

 

Now that we have addressed the myths and facts associated with closing credit cards, let's discuss some tips to minimize the negative impact on your credit score:

1. Pay off Your Balances: Before closing any credit cards, make sure you pay off your balances. This will ensure that your credit utilization ratio remains low, which is crucial in maintaining a good credit score.

2. Keep Your Oldest Credit Cards Open: The length of your credit history is a crucial factor in determining your credit score. If you have an older credit card with a good payment history, it's best to keep it open. This will show lenders that you have a long credit history, which is viewed positively.

3. Consider Downgrading Your Credit Cards: If you have a credit card with an annual fee that you're not using, consider downgrading it to a no-fee card. This will allow you to keep the credit history associated with the card while avoiding the annual fee.

4. Monitor Your Credit Score: If you do decide to close a credit card, make sure you monitor your credit score regularly. This will allow you to see the impact of closing the card and take any necessary steps to improve your score.

 

Conclusion

Closing credit cards can have a negative impact on your credit score, but it's not always the case. It depends on several factors, including your credit utilization ratio and credit history. By understanding the myths and facts associated with closing credit cards and following the tips provided, you can make an informed decision that minimizes any negative impact on your credit score.

Remember, your credit score is a crucial factor in your financial well-being, and maintaining a good score requires responsible credit management. Always pay your bills on time, keep your credit utilization ratio low, and monitor your credit score regularly to ensure you're on the right track.

 

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