Why Closing an Account Can Hurt Your Credit
Most would agree that being a responsible adult means achieving and maintaining a good credit score. After all, good credit is a necessity for getting the car, housing, and even job you want. For one thing, good credit is needed for low-interest credit cards or personal loans. Perhaps one instinct, as you seek to improve your situation, is to close an existing credit car account. But that could be a mistake. Read on for reasons why – and more.
What is Good Credit?
For those not aware, a three-digit number that falls between 300 and 850, known as your FICO score designates your credit rating. The higher the score, the more creditworthy you are perceived to be. In other words, you are some one who has good credit. It is worth noting that several things can lower our FICO score in addition to closing an account.
What You Should Know About Your Credit Score
According to the three credit bureaus — Equifax, Experian, and TransUnion — FICO scores that fall between 690 and 719 constitute good credit. And a score that is above 720 is considered excellent.
On the other end of the spectrum, a FICO score ranging from 630 to 689 meets the criteria for having fair credit. Lastly, a score below 630 constitutes having bad credit. Making one’s car, credit card, and other installment payments on time is a great way to maintain a good to excellent credit rating.
And with good credit, as we’ve mentioned, comes the ability to qualify for a relatively low-interest loan when you want to purchase a home or a new car. Essentially, the world is your oyster when you have good credit, a sentiment echoed by all three credit bureaus in the U.S. That said, there are a few things that could just as easily ruin your credit as well, one of which is closing an account.
The best thing you can do to keep your credit score high is pay your bills on time. It also helps to avoid charging your cards up to their limits. In fact, using less than 30% of your available credit is best. This is where closing an account can give you a problem.
How Closing an Account Affects Your Score
Now that we know what it takes to achieve and maintain good credit, let’s shift gears a bit and discuss how closing an account with a creditor can affect your credit standing. This is something you might be tempted to do if you consolidate bills and get an account’s balance down to zero. However, as you’ll learn at https://www.bills.com, closing a credit card account can actually lower your credit score.
When an individual closes a credit card account, they, of course, lose access to the available credit limit. But in addition to that, they will also see their credit utilization ratio go up a fair bit. For context, credit utilization refers to the percentage of credit an individual uses. And the higher their credit utilization, the more risk they pose to a prospective creditor in terms of creditworthiness.
Also noteworthy, closing just one credit card can lower the average age of all other accounts on someone’s credit report. When the average age of the accounts on a credit report is too low, it can result in a lower FICO score. Further, if the closed account had late or missed payments, that information can remain on your credit report for up to seven years. And all these things can dictate whether you will qualify for future loans.
In summary, while there are good reasons for closing an account, individuals should keep in mind closing an account can hurt your credit. And this is true whether you consolidate bills, or just want the account to be gone.