Understanding your credit score can seem like a game. Some mistakes are obvious, while others may put you back to square one. Yet, one of the biggest mistakes millions of people are making – one that that they think is helping, but rather hurting their line of credit – is closing credit card accounts. Just don’t do it.
Creating a line of credit is simple. For college students, a representative of a company may offer a free t-shirt with the opening of a new account. Other businesses may offer you a card with a low APR, annual percentage rate. Soon enough, the cards start stacking up and you’re behind on payments.
According to the federal government, the average U.S. household has a credit card debt of $15,200. Tackle on student loan debt of $33,000 and mortgage debt of $148,000, it can stress out just about anyone.
Yet, as people manage their finances, many people consider getting rid of one of the supposed sources of the problem: credit cards.
Credit cards are an essential part of everyday living. They function as a basic small-term loan, with the promise that you, the loyal customer, will pay it back by the month’s end. Of course, for those who can’t meet that goal, they’ll end up paying a high interest rate and extra feeds over time.
After you finally pay off your credit cards, it’s important to keep those cards – under no circumstances should you cut them. Closing an account will actually hurt your credit score, which defeats the purpose of getting rid of it overall.
A credit score is important; it’s a quick and easy way for a creditor to determine how good of a customer you’ll be. Scores range from 300 to 800 points. People who have a score between 650 and 719 are considered to be above average. Scores 550 to 649 are average, and anything below 549 is below average. People with a higher credit score indicate to a company that they have a better credit risk.
When you close a credit card account, you are reducing your overall credit loan potential – and that is considered a bad thing among credit card companies. They want a person with a large wealth of credit, as it shows how much lenders are willing to risk on your behalf. This is called a “credit utilization ratio,” which composes about 30 percent of your credit score.
“First, the implications could come further down the road, long after you’ve forgotten about that closed account,” reads a recent Yahoo Finance article. “The good news is that good credit sticks around longer than bad credit. Delinquencies and bankruptcies will stain your credit history for seven years and 10 years respectively, but a credit card account with zero delinquencies stays on your report for a full 10 years after it’s closed — and your credit score will benefit from that history during that time.”
The problem is that after 10 years, the closed account will drop off your credit report.
“And when it does, you’ll lose all of the positive history associated with that account,” the article continues. “And if your overall length of credit history declines when that account goes away for good, then your score will take a hit. Surprise!”
HOW TO FIX CREDIT SCORE
1. Be patient. Scores takes years to rebound, but start off by paying the most you can on your bills on the due date.
2. If you do close a card, pick one that counts most. You want to keep a card you’ve had longer, a card with your highest credit limit and the one with the lowest interest rate and fees. Consider closing cards with high fees and low credit limits.
3. Good timing. Be sure to close the card after you apply for a loan. It may lead to higher interest payments
Credit is a big part of life. From mortgages to credit cards to auto loans, credit is a critical part of our everyday lives. Credit Fate helps thousands of Americans learn their credit history and how to improve it. Founded in 2007, CreditFate.com is accredited by the Better Business Bureau and it secure by digicert and Norton Secured.
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