What Impacts Your Credit Score?
Your credit score is a complex makeup of several factors. The five main areas that influence your credit score breakdown include payment history, amount owed, length of credit history, credit mix, and new credit.
Each of those factors plays a role into determining what your credit score is between 300 and 850. Although each factor is weighted differently, they're all important.
How Closing a Credit Card Affects Your Credit Score
Closing a credit can negatively affect your credit score. One of the main reasons is your credit utilization. Once you no longer have the credit card, you lose the available credit limit, which raises your credit utilization.
For example, if you had a combined $8,000 credit limit across all your credit cards and you closed the credit card with a $4,000 limit, you slashed your credit limit in half. If you have a balance of $2,000, your credit utilization will shoot up from 25% (when you had your $8,000 limit) to 50%. Since that's higher than the recommended 30%, your credit score could go down.
Another reason closing a credit card can affect your score is that it can lower the average age of your credit accounts. The longer you've held onto the credit card you want to close, the more it will lower the age of your accounts. However, it's not a big deal since closed accounts that have been in good standing will remain in your credit report for 10 years.
Even if closing a credit card may initially lower your credit score, you can improve your credit within a few months. That is, as long as you exhibit responsible behavior like continuing to make on-time payments.
When to Close a Credit Card
Closing a credit card isn't a good idea in most cases. However, there are a few situations when it makes sense.
Closing a Credit Card After Separation or Divorce
If you experience a major life event such as a separation or divorce, closing a joint credit card prevents your ex from running up charges. If your ex remains as a joint owner, you can still be held liable for any charges, even if you weren't the one making the purchases.
Switching from a Secured Credit Card to an Unsecured Card
Perhaps your credit score went up to the point where you can now qualify for an unsecured credit card. Closing or upgrading from your secured credit card makes sense — you can get your deposit back and continue to build credit.
Closing a Credit Card to Avoid Spending Temptation
In many cases, people close their credit card because they can't resist the temptation of spending. If you've tried hiding your credit cards and removing the information from online shopping portals and still overspend, it might be best to close the card.
How to Close a Credit Card Correctly
If you've decided you want to close your credit card, here are the steps to do it correctly:
- Pay off the Balance: If you still owe money on your card, make a plan to pay off your credit card debt so you don't owe money after you've closed it.
- Redeem Your Rewards: Many card issuers' rewards programs expire once your credit card account is closed. Don't let your rewards go to waste. Redeem them all before closing the card.
- Contact the Credit Card Issuer: Call them to confirm the balance is at $0 and let them know you want to close your credit card.
- Cancel Your Automatic Payments: You'll need to update any recurring payments connected to the credit card to ensure you won't accidentally miss any payments.
- Mail a Letter: Follow up your request in writing to confirm that the card is closed. The letter should have your full name, address, phone number, and details about the credit card. Don't forget to keep a copy for your own records. The issuer should send you a confirmation letter indicating the account's been closed.
- Check Your Credit Reports: Wait around 30 days before checking your credit report to see whether the account has been closed and the balance is at $0.
- Cut Up the Card: Doing so prevents others from trying to use it. If you had authorized users, ask them to cut theirs up too.
Closing a credit card makes sense in certain situations, but it's crucial that you understand how it can affect your credit score. Before doing so, check your credit report to determine whether closing it will adversely affect your score. It might be worth keeping the account open, even if you have to stick the credit card in a locked drawer for a while.
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