Why Closing A Credit Card Hurts Your Credit Score

Why Closing A Credit Card Hurts Your Credit Score

Ah, the perfect credit score. We all dream of it, and a few attain it, but the truth is you don’t really need a perfect credit score to get the best interest rates on loans. A good credit score is enough for most people’s needs, but that may be tricky to obtain and hard to come by, especially when you get misleading information about what goes into a credit score. And while nobody is sure of the formula for every individual for every reporting agency, experts have gotten really good at determining what hurts your score.

What Hurts Your Credit Score?

  • Bankruptcy, defaulted loans, repossessions, foreclosures
  • High debt to available credit ratio
  • Not enough credit
  • Short credit history
  • a few other minor things like “hard credit pulls” (lenders looking up your score)

Bankruptcy, defaulted loans, repossessions and foreclosures are usually a choice nobody wishes to make and are usually the result of some seriously troubling life circumstances that nobody anticipates – death, divorce, illness, job loss, etc. While we aren’t going to touch on those issues here other than a mention, I do want to say there’s hope after these situations. More on that later!

High debt to available to credit ratio is why you never want to close a credit card. I know you’re thinking, “This makes no sense! I have five credit cards and paid one off; if I close it, it will show I am responsible!” Logic would say so, but that’s not how credit scores work. Debt to credit ratios are considered “Good” when they are less than thirty percent – meaning, you are using less than thirty percent of the credit you have available to you. When you close a credit card, you are reducing the amount of credit you have available to you, sometimes by tens of thousands of dollars, and your score can theoretically take a major hit (like a hundred points or more!) Ouch. The best thing to do is leave that card open and alone. You can cut it up if you want to, just don’t call and cancel it. It will show as available credit, but you’ll owe nothing, which is only a boon to your credit.

Various types of credit help improve your score. For instance – if you have a mortgage, an auto loan, a credit card, and a school loan, and all of those are in good standing, that shows you are responsible in various areas and have a vast array of vested interests in our society and aren’t likely to just fall off the grid. If a loan company looks you up and sees you just have a credit card, it looks a little more concerning to them. Obviously, these things take time, and it’s probably not a great idea to acquire all these in the same year (for your credit or for your sanity). In general, though, variety is good.

Short credit history is another thing that can be affected when you cancel a credit card, so don’t do it. Credit history is the average of all the credit you have. If you’ve had a credit card for ten years, an auto loan for two, and a student loan for five, your credit history average is going to be 5.6 years, which falls into the average category for most reporting agencies. If you cancel your credit card, your history would quickly drop to 3.5 years, which is a category that often “needs work” and can hurt your overall credit score. Again, just leave your paid-off credit card open and don’t use it.

When you apply for a loan, the issuing bank or company will look up your credit score. One or two won’t do much to your score. But if you have twenty in a month, it could drop your score quite a bit, because it seems like you’re desperately trying to get loans anywhere you can. So think carefully about what you really need and when you need it, and also consider what you will be likely to be approved for.

Credit scores are a bit of a mystery, but there is an art to them. With time, you will learn what affects your credit and therefore affects your potential to obtain loans.

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