Credit Card Mix

Almost everybody seems to know that closing a credit card account will affect one’s credit score. However not many people know why and how it happens. Some people speculate that banks are to blame for lowering credit scores, as if they did it as a “revenge” move on their former customers. Others say that the scores go down because closing a credit card is taken by the credit bureaus as a sign that one can no longer afford a credit card. These and many other statements are myths and do not even come close to explaining the real reason. Let us show you what really happens when you close out credit card accounts.

Why The Score Goes Down

When a credit score is calculated, one of the arguments that is taken into consideration by the formula is the “credit utilization ratio”. This component reflects the amount of money owed to the total amount of credit available to a person. So, if you close out a credit card, the credit amount available to you will decrease. If you close a few accounts, it will accordingly effect the ratio value even more. Consequently, the more accounts one closes simultaneously the more impact it will have on his or her credit score.

Will It Permanently Damage My Credit Score?

The damage is too big of a word for the situation. It will bring the score a few knots down, but it is going to be a temporary inconvenience. In most cases your credit score will go back up in 4-6 months as you open new accounts. However if you close the oldest of your accounts you may also lose a few points, which might be harder to get back, for long-standing relationship is another important component in score calculations.

When Is It a Good Time to Close a Credit Card Account

As a rule, you will be better off closing out your accounts when you do not expect to be applying for another credit card, loan or any other line of credit for at least 6 months. You may, as well, leave your accounts active and just simply monitor them from time to time to make sure they are in good standing, given that you do not have to make annual or any other type of regular payments to keep them current.