You should think twice before closing a credit card
Many people have adopted a frugal lifestyle lately to help
them adjust to today’s difficult economic conditions. They’ve trimmed their budget,
adjusted their spending, and taken steps to maximize their earnings. In order to avoid
the temptation to overspend, some have opted to close their old or unused credit cards.
Although this seems like a logical approach,closing credit cards can actually have a negative
affect on your credit score.Regardless of an account’s status, whether
positive or negative, closing that account can cause a score to drop. That typically
happens when there’s an increase in the percentage of available credit in use. That
measure is an important factor in today’s economic climate.
Let’s take a look at an example.Joe Consumer has 4 credit cards, each with
a $4,000 limit.
That means Joe has a totalof $16,000 in available credit. Joe has zero
balances on two of the cards, but he owes a total of $4,800 on the other two. That means
he’s currently using 30% of his available credit – that’s the $16,000 in available
credit, divided by the $4,800 he owes. Joe feels that 30% is a bit high, and he may have
a point. Someone advises him to close the two cards that have no balances.
At first, this doesn’t appear to be a bad idea. Joe wasn’t using the cards in the
first place, but he’s going to discover that closing the cards will have an unintended
effect on his credit profile. When Joe closes the two accounts, he reduces his available
credit to just $8,000. Though he’s less at risk to incur any debt beyond his comfort
level, he also may have jeopardized his ability to secure financing that may be necessary
for any other goals he has. Remember, Joe had outstanding balances totaling $4,800.
When you divide his available credit by the total amount he owes, the percentage of credit
Joe is using skyrockets to 60%. This increase can be a red flag to lenders, so Joe may want
to rethink his strategy.Even if he decides not to close his cards,
his bank may decide to do so for him. With today’s economic challenges, banks are routinely
adjusting their exposure to risk. Some banks have reduced their clients’ credit lines,
while others have closed accounts that have been inactive for some time. Either of these
scenarios may adversely affect the percentage of credit in use.
Further complicating matters is the age of the card someone chooses to close. The amount
of time an account has been open is a factor in credit scores. A longer, positive history
is beneficial to credit scores; therefore,closing an older account that’s in good
shape could impact your score significantly.It’s difficult to predict precisely how
much this will affect your score. That’sbecause the scoring formula weighs everything
in a person’s credit history in relation to each other, at a given moment. So, for one
person, closing an older account can represent a higher risk than it does for another person,
simply because of the unique nature of their overall credit report.
If you absolutely want to close a card, or if you’ve discovered that your creditor
has already done so, there are a few things you want to do. First, if the account is still
open, break out the calculator and determinethe effect that closing the account will have
on your percentage use of available credit. Next, check your credit report to ensure that
the accounts have been marked as closed and to determine whether there are any errors.
Also, destroy your canceled credit cards to prevent someone else from stealing them and
attempting to reopen the account.
Well, that’s it for this edition. As always,
we welcome your feedback and ask for your thoughts and suggestions by e-mailing us at
CreditRepairNewYork@yahoo.com. Thank you for reading. Until next time, I’m Thomas
Felix for Credit Repair New York.