The implications on closing a Credit Card account
For most of us, closing a credit card account means picking up the phone and calling our credit card supplier to tell them that you wish to cancel your credit card, and then picking up a pair of scissors and cutting up the cancelled card into as many pieces as you can. And that is that, but is it? The first thing to consider before making the decision to close a credit card account is what affect it will have on my credit rating. Closing a credit card has a negative effect on two aspects of the way your credit rating is calculated, one, the level of your debt and two, the length of your credit history. It is very important to realize that by canceling your credit card, your credit rating becomes lower, especially when the credit card account you are closing still has a balance and available credit, and you have other credit cards that you have retained, and they have not. Your credit rating will also be adversely affected if you close either your oldest credit card, or your only credit card.
If you are under the impression that by closing a credit card, the history associated with that card is also ‘closed’ or erased, you would be sadly mistaken. However old the credit card is, even one that you have not used for years still has a history regarding your credit transactions, and that remains as part of your credit report and contributes towards your credit score, even though the credit card associated with the history has been closed.
Fine, if you have a long history of on-time payments on that card, not so good if the credit history of the card is not as white as it could be.
Before closing any credit card, it is worth taking a look at whether or not, this course of action will have the overall effect of decreasing your total available credit compared to the balances you carry on your card, and just because you pay off the balance associated with your credit card every month, the average amount left in your card during the month is still considered a credit. If you hit, or nearly hit the limit of your available credit, even if it is only for a few days, it will still have an adverse affect on your credit rating.
One of the things you can do to avoid this happening to you when you close a credit card account is to increase the credit limit on your other card or cards (providing your credit card provider allows you to do so) so as to retain the same credit level you had with the credit card that you have closed. In other words, you still have the same ratio of debt to available credit but you have now fewer cards.
There are many reasons why somebody would close a credit card account, perhaps one of the most important is to reduce the risk of identity theft. Cards that remain unused, lying about in drawers are more at risk to be stolen and used without your knowledge, than those credit cards that you use on a regular basis.
Your credit score determines your credit rating, which in turn, governs what credit facilities and deals the various lenders within the financial world offer to you. Before taking any action that could adversely affect your credit score, think it through, is it really necessary. Your credit rating depends on positive behavior, any information that is seen as a negative will have an adverse effect on your credit score. By keeping all information regarding your credit history positive, your credit score will remain steady and not fluctuate. This is especially important for those of you thinking about taking out a mortgage or applying for a loan, do not do anything that could influence (in a downward direction) your credit score.
Closing any credit card account will have some kind of impact on your credit score, but there are some situations that will affect your credit score far more than others.
A credit card that has a balance
When you close a credit card that still retains a balance, your credit is lowered to zero, and because you still have balance on that credit card with no credit limit, it appears you have reached the card’s limit. Now, 30% of your total credit score is made up by the amount of debt you have, so a credit card on the limit, or one that looks as if it was on the limit, does not do your credit rating any good at all.
Your only credit card
Of course, there are times when canceling a credit card is a must, for example identity theft and fraud situations, your credit card provider may tell you to close your credit card to stop the fraudster from causing more damage to your already embattled credit rating.
Closing a newer credit card that does not have a balance and you no longer use is fine, providing you have other credit cards you can use.
If you do have to close a credit card for any reason, write to your credit card provider giving notice that you wish to close the credit card, you should also ask for written confirmation that the credit card account has been closed without any detriment to yourself.
Remember, you should be just as choosy when closing a credit card as you are about applying for one. Make sure that any action you take regarding the closure of a credit card will not have a negative impact on your credit rating.
