How Closing Your Credit Card Can Affect Your Credit Score
One of the most common questions in personal finance is whether to cancel unused credit cards.
After all, if you aren't using the card, why keep it?
In this article, we will go over how closing a credit card can impact your credit score.
What to Know When Closing a Credit Card
When you close a credit card, the creditor will report it to the credit bureaus. It will typically appear on your credit report within 30-90 days.
You will typically receive a statement in the mail prior to the account closing.
If you are planning on closing an account that has a high credit limit it is important to use all of that credit prior to closing the account.
For example, let’s say that you have a credit card with a high credit limit of $20,000. At that point, if you have a small credit line of $1,000 it will not have a large impact on your score. This is because the credit utilization is only 5%.
On the other hand, if you have a credit line of $20,000 and a credit utilization of $1,000 it will have a much larger impact on your score because this would be a 100% utilization. In this case, you would want to charge everything you can before closing the account.
It is important to note that if you have a high credit utilization it can have a negative affect on your score. This is why it is important to have at least two months of living expenses in your savings before closing the account. Once you have paid off all of your credit cards or paid down your balances to an acceptable level, you will be able to close the account without having a negative affect on your credit.
How Credit Reporting Works
According to the credit reporting agencies, accounts that are closed by the consumer can stay on the credit report for up to ten years. This can have a negative impact on your access to credit in the future.
This is the universal rule for all credit card accounts.
If you close an account that was opened as a credit card and then converted to a revolving account it will appear as a revolving account on your credit report for up to seven years.
If you closed a credit card and it was later closed by the creditor, it will appear as a non-mortgage loan on your credit report for up to 10 years.
THE BOTTOM LINE
It is important to note that if you close a credit card and it is showing as an inactive account on your credit report, it will typically fall off your credit report between six and twelve months. Contact the creditor before you close the account to ensure that the account is closed.
Credit reports are used by creditors to determine whether or not you are credit-worthy. This is because the creditor does not want to lend money to someone who has a history of not being able to pay their bills. The creditor will look at your payment history, how long you have had credit, the amount of credit that you currently have, the amount of debt that you currently owe, and any derogatory information.
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Paul Davidescu (www.levelupmortgages.com)
Level Up Mortgages
604-809-3188
paul(at)levelupmortgages.com
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