Think Credit Score Before Closing Your Account
If you are dissatisfied with the service of a restaurant, which has cut back on its staff, firing staff, including the head chef while jacking up its prices, you can always decide not to go back.
But that’s not the case with credit card consumers who have been on the losing end. Sure, you can just close that credit card account. But at what price? That is, hurting your credit score. If this happens, getting a mortgage, a car loan or even a new credit card would be costlier.
Previously, the better way to solve this problem was merely to pay off the balance and just stop using the card. While the account is open, the credit score is unaffected. However, this would carry a cost. With the new restrictions introduced by the time credit card reforms take effect on Feb. 22, issuers will look for ways to generate revenue. Some would add annual fees while others would bring back inactivity fees once cardholders fail to use their cards for a specified period of time.
In this regard, the credit score gets affected if you don’t pay such fees. When you close the account, however, the effect on the credit score varies and this depends on your credit card profile, experts say.
Before closing that account, here are the things you should consider:
First, you should know your total available credit. When you close a credit card account, this could possibly hurt your score due to what is called as the credit utilization ratio. This ratio is determined based on the outstanding debt amount as a percentage of your available credit. As such, if you close your account, this will decrease your available credit, thereby resulting in a higher utilization rate.
Second, you should know your present credit score. Consumers with high scores can afford to lose a few points. These range from 300 to 850. So if your present score is about 820 to 830, losing those miniscule points as you close your account will not affect your ability to get a loan.
Lastly, you should take your borrowing plans into consideration. If you have a lower score, say in the mid-700s, it will be wise not to apply for a loan once you decide to close your account. But if you are planning to refinance your mortgage or plan to purchase a new car, the wisest move is not to close your credit card account until your loan has been approved. This is because lenders are more focused on credit scores than ever. To get loan approvals, you would want a credit score in the high 700s or the low 800s.
