A person’s credit score is determined on the basis of their financial record. Have they taken a loan in the past, did they miss out on an EMI payment, did they default anywhere in their tenure. Such things can have a drastic impact on a person’s credit score. Even credit cards play a huge role in calculating the credit score.
This score is comprised of many factors. Some of them are-
–Your past payment history.
–The amount of your outstanding debt.
-The length of your credit history contributes
-Types of credit accounts you have.
A credit score is important due to the fact that it is the most important thing that is considered whenever a lender is evaluating you as a borrower. Most lenders do not give personal loans and credit cards to people with unsatisfactory credit scores. Even if they do, the rates and deals offered to you will not be the best and you might have to compromise on them.
Credit cards are a great way to build a credit report in case you are new to credit. Mostly because they are easier to obtain and easier to manage. Having said that, if you are not attentive with your repayments and miss out on a few dates, you might hurt your credit score.
One might be tempted to close their credit card in case they are unable to handle their accounts. Read on to find out how closing a credit card may impact credit scores.
Whenever you get a new credit card, the history of that account is also included in calculating your credit score. If you close that account without paying the outstanding balance, it would still appear on your history and your score may go south. Hence it is crucial that you pay the entire balance before you close the account.
Also, the older the account is the better it is for your credit score. If you have a long history associated with a credit card, you might want to hold on to it. This would be pivotal in increasing your credit score as the age of the credit history is a very important factor in the calculation.
Also, when you close a credit card account, you reduce the amount of credit that is available to you. This might mean additional exertion on your other cards. Consequently, that might hamper your credit utilization ratio, that is the amount of credit you have available over the amount of credit you have utilized. It is recommended that you keep your credit utilization score of 30%. Keeping your credit utilization score high would also result in the reduction of your credit score.
Below are the situations where it is okay to close your credit card account-
-Your account is not too old
-You don’t use the card much and it comes with an annual fee.
-The card is less optimal than the other cards you own.
-You are not looking for a loan in the near future.
-The card does not offer a lot of rewards or cashback.
Here is the situation when you should not close your credit card-
-You still have some balance in the card. You need to repay the full amount before closing.
-It still has available credit when your other cards don’t. You can use this in emergency expenses.
-The card is old enough to reflect positively on your credit report.
-It is the only credit card you have. Having a credit card has its own benefits so you might want to reconsider before you close all of your credit card account.
If you decide that closing the credit card is definitely something you want to do then here are the steps to do that-
All in all, closing a credit card does have a direct impact. So when you consider closing one, be absolutely sure about it. Choose the card that you want to close very carefully and remember the do’s and don’ts mentioned above. Your credit score is a very crucial thing as far as your personal finance is considered so you must take special care as to whether or not your closing the credit card would hurt your credit score.
We hope these details covered everything you needed to know about how closing a credit card account may impact the credit score. To learn more about finance and embark upon a wonderful journey of personal finance, read our personal finance blog and stay ahead of the curve with IndiaLends.