Maintaining good credit often requires you to let one truth sink in: probably the most common mistake is closing an old credit card once it’s paid off. This may seem an excellent way to, say, sort out your finances. But the calculation formula for credit scoring often rewards longevity and available space. Closing an account, even one you no longer use, will trigger so many changes in the credit bureaus viewing its signs of increased risk.
Lowering Total Available Credit
Your credit score is influenced greatly by what percentage of your available credit you are actually using. Closing a card terminates a valuable credit amount that gets immediately reduced from your overall available pool. For instance, let us say you have two cards with a credit limit of $5,000 and happen to close one. This reduces your amount to the remaining $5,000 with an unavoidable extra payment.
Spiking Utilization Ratio
Credit utilization represents the amount of loan you are owing from your total credit limit. Whereas being $2,000 in debt on a total limit of $10,000 would represent 20% use, close the old card, and your limit drops to $4,000; now that same debt of $2,000 is now considered 50% utilization. Experts mainly recommend keeping it below 30% to prevent it from dropping the score.
History of Short Credit
Lenders are always attracted by long histories proving a borrower’s trustworthy management of debts. Your credit score takes into account the average age of all your accounts initiating the gradual lengthening of credit history. Obliterating an old account, primarily one you have had for a decade or more, is eliminating this average age, making you appear too young an experience in borrowing.
Long-Standing Positive Record
Old cards that stand as open accounts for many years give backbone to your credit report. The record proves that you are able to maintain a relationship with a lender over a long period. You are running the risk of trashing all this as that account goes “poof” off your credit report after you close it.
Credit Mix
When credit bureaus look at the variety of accounts you have, including–but clearly not limited to–credit cards, auto loans, and mortgages, they do so in terms of how positive it is to have this very same account. Should this loan happen to be one of the very few revolving accounts, your credit mix would hide more of one item than is probably advisable. A further consideration might be that less experience with different types of lending can cause you to absorb a few points in benefits of the overall calculation of your score.
The Ten-Year Falloff Rule
You know that for a closed account, it will be well regarded for ten years. The account will eventually disappear. That means when one’s age is falling behind for the first time, a closed account can nudge your credit with its full weight, even more significant than ever before.
Potential for Quick Point Loss
Since credit rating companies calculate scores in real-time based on reported data, the abrupt loss of a credit limit can actually mean the immediate dangle or loss of several points. This can get very nerve-racking, particularly if you are working on securing some major financing—say, a mortgage—soon and require every measly point you have.
The Closure of Accounts under Pressure
Sometimes, closing one or more accounts quickly can make lenders think you are struggling with concealed debt. A stable long-term account is established as a sign of a sound financial life, whereas frequent changes can create a “noisy” credit report, revealing an alarming, not sustained, attempt to access credit to informal credit models.
Hidden Bonuses from Inactive Accounts
The existence of a dormant card without any balance, use, or reward attached to it will still inadvertently boost the score by helping to establish a buffer credit. Most likely, as long as the card has no extortionate annual fee, it is advantageous to throw it in a drawer and let it age, increasing your total available credit without having to incur any actual expenditure.
Loss of History with “Good Debt”
No, not all debt is evil; the very opposite is true. Indeed, for credit reporting agencies, an open credit card with a zero balance is called “good debt” since it means that you know how to use and not misuse your credit privileges. Closing an account will indisputably pose a blow of evidence of your being in control right out of your active checking profile.
