Closing Credit Accounts Can Crater Your Credit Score
In these times of extreme volatility in the credit markets, most consumers are trying to do everything that they can to maintain their credit rating and ensure that they will be able to obtain credit when it is needed. Along with insuring that all payments are made on time and refraining from using a large percentage of available credit, there are a number of steps that a person can take to maintain or increase their credit score. What many people do not realize is that there are numerous ways to wreck their credit score as well, with one of the most common being closing credit accounts.
How Does Closing Accounts Affect My Credit Score?
Closing your open credit accounts may seem like a good idea when you are trying to save money and decrease the chances that you will make a mistake with the account, such as missing a payment or going over the credit limit. People that have gone through the process of paying off hefty credit card bills may feel more financially secure when they no longer have those credit cards to use, erasing the temptation of placing items that they cannot afford on the credit card. Unfortunately, this is one of the fastest ways to destroy your credit score.
The reason why closing credit accounts can do so much damage to your credit score so quickly is because reducing the number of credit accounts in your name reduces the amount of credit available to you. A large portion of the credit score calculation is based on the amount of debt a person holds relative to the amount of credit that a person has available to them. For example, a person that has $15,000 of credit available on multiple credit cards but only has a balance of $5,000 is only using 30% of their available credit, which is good in the eyes of the credit rating agencies. But if the person closes a $5,000 credit account because they are not using the credit card, their available credit amount drops to $10,000 and they are now using 50% of their available credit, a level that can knock points off of their credit score.
Although it may seem counter-intuitive to leave credit accounts that you are not using open, having the credit available to you can be more beneficial than closing the account and taking the hit to your credit score.
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