Dealing with credit can be a daunting task. There are many reasons for this, one being that there are many conflicting ideas on what is the best way to deal with a particular credit issues.
For example, is it better or worse to close out an old credit card? More specifically, how will this affect your credit score?
Well, while some believe that closing out a credit card will be better for your credit, there are however actually some surprising ways that closing an old credit account can in fact, hurt your score.
Here are a few ways that closing an old credit card can affect your credit score, in terms of certain aspects of your overall credit portfolio.
If you do choose to close your credit card, your payment history for example, will not be automatically be erased. Whether or not your credit history was good – or bad, by closing your account, this track record will remain the same for some time. Moreover, since payment history does account for 35% of your total credit score calculation, having a lengthy credit history is deal.
With that being said – eventually, if you have closed an older account, it is more likely that your credit score will decline somewhat, until you again build up the length of time attached to your other credit sources.
Credit History Length
Touching again on the topic of credit history longevity, your credit history will remain attached to a credit card for unto 10 years after the account has mean closed. Credit history length also makes up about 15% of your credit score, so it is also an importance element of your overall credit score.
Since, it does take a long time to build up a solid credit history based on the length of your credit sources, then it also then makes sense how closing an old card can negatively impact your credit score. Therefore, it is best to keep credit sources in tact as long as you can and build a positive credit score in the process whenever possible.
Variety of Credit
If you are thinking about closing out an old account, one other aspect of your credit that you need to keep in mind, is the variety of credit sources you possess.
Specifically, if you only have one credit card and you are closing it, this may then leave you with less credit diversity. If, however you have more than one credit card, as well as other credit sources, and you close out an old credit card – then your credit score has a better chance of remaining strong.
Ultimately, since maintaining a mixture of credit sources, represents 10% of your credit score, you will want to make sure you are not limiting your credit variety by cancelling your old credit account without other cards to keep this aspect of your credit score going strong.
Credit Utilization Rate
Last, but not least – your utilization rate will also carry some important implications for your credit score. Your credit utilization rate represents the available credit percentage you have on your overall credit portfolio and it also significantly impacts your credit score, by contributing to another 30% of your overall score.
Therefore, for example, if you have used up 30% of your credit balance, and have 70% credit remaining on your accounts, this is more likely to point towards a positive credit score. Now, with this being said, if you close out an old credit account, what happens is that your are actually lowering the level of available credit you can at your disposal. In turn, this change in available credit can also mean a drop in your credit score.
If you do want to still close your old credit card however, then perhaps increasing your current credit limit is a method of preventing your credit utilization rate from negatively impacting your credit after all. Alternative, you can also look to pay off some of your credit card debt to again improve your utilization rate once again.
In the end, closing an old account doesn’t have to mean that your credit will take a huge dive, however it can still lower it to a certain extend. Ultimately, by being aware of this outcome, you can take steps to avoid falling into a bad credit situation and instead, learn how to make your credit work for you in the most productive of ways.