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Why Closing a Credit Card Could HURT Your Credit Score - YouTube
Channel: The Motley Fool
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if you have an old credit card sitting
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in the back of your wallet that you
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haven't swiped in years you might be
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tempted to close your account however
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unless the card comes with an annual fee
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most credit score gurus will say to
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leave it open and often they're right
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but there aren't many one-size-fits-all
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answers when it comes to personal
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finance
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I'm Seri buld win' and in this video
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from the isense money lab we'll show you
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how closing a credit card if done
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correctly can leave your credit score
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unharmed or even raise it should you
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close an unused credit card your credit
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score is calculated based on five
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different factors two of those factors
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are directly affected by your unused
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credit cards and those are length of
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credit history and credit utilization
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ratio length of credit history is
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basically how long you've been using
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credit cards and it makes up 15% of your
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FICO score more specifically it's
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influenced by the age of your oldest
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account the older the better
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the age of your newest account a gun
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holder is better and the average age of
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all your accounts combined this is why
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it's smart to leave unused credit cards
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open especially if you've had them for a
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while according to Experian one of the
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major credit reporting agencies closing
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the account with a long positive history
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may not always be the best action to
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take for your credit score's credit
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utilization ratio is even more important
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it's the portion of your available
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credit you're currently using and it's
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responsible for 30% of your FICO score
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it takes into account your overall debt
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to credit ratio across all accounts and
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your individual credit card balances as
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compared to their limits credit scoring
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company vantagescore recommends keeping
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these ratios below 30% but the lower the
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better unused credit cards boost your
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credit score by lowering your credit
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utilization ratio let's look at an
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example of a person's hypothetical
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credit utilization ratio before and
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after closing a credit card with a
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$5,000 limit say you have $20,000 in
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available credit and you generally use
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about 5000 of that that will give you a
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credit utilization ratio of 25% now if
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you close that card your available
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credit would dip to 15,000 and if you're
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spending stays the same your utilization
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would be 33%
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as you can see closing that unused
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credit card would bring your credit
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utilization ratio above the 30%
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threshold and likely cause a decrease in
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your credit score your credit
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utilization ratio and length of credit
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history are the reasons why it's often
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best to keep unused credit cards open
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however there are some circumstances in
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which closing an unused credit card
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might not hurt your score and it may
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even raise it if the credit card in
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question is a newer credit card or your
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newest credit card then closing it is
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unlikely to have a negative impact on
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your length of credit history if it has
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a low credit limit or if you don't have
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much debt then it shouldn't have much of
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an impact on your credit utilization
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ratio either
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even if closing a credit card does
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increase your credit utilization ratio
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this number is updated continually so if
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you plan to pay off your debt in the
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next few months you'll see that rate go
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right back down if you have multiple
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credit cards with the same issuer they
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may allow you to transfer your credit
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balance from a closed credit card over
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to your remaining card say you hold four
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credit cards with a single card issuer
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but you close one of them because it has
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an annual fee that credit card has an
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eight thousand dollar credit limit and
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you ask your card company to transfer
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that credit limit to one of your other
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cards and they're happy to do so
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this means that even though you're
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closing a credit card with an eight
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thousand dollar credit limit your
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available credit remains the same in
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fact you could even see a slight bump in
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your credit score for two reasons first
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your credit utilization ratio on an
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individual credit card may go down
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imagine you're closing a credit card and
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transferring its eight thousand dollar
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limit to another card that has a $5,000
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limit and a two thousand dollar balance
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thanks to that limit increase the credit
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utilization ratio of that card will drop
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from 40 percent to 25 percent remember
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while your overall credit utilization
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ratio is important so is your credit
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utilization on each individual account
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second your length of credit history
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went up the average age of all your
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accounts is a major factor in
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calculating the length of your credit
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history and the credit card you closed
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may be your newest one let's say you
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have three credit cards one that's ten
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years old one that's five years old and
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another that's one
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your average age of all accounts is 5.3
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years however if you close the credit
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card that's only one year old this
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figure increases to seven point five
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years if you're strategic about it
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closing an unused credit card can help
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your credit score rather than hurt it
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that said if the card is one of your
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oldest you should leave it open
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the only reason to close an old account
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that's in good standing is to avoid an
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annual fee but you should start by
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asking your issuer to waive that fee and
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if it doesn't work see if you can
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downgrade the card to one that has no
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annual fee if you need to close an old
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credit card you'll probably see a drop
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in your credit score however as your
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accounts age and you continue to pay
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your bills on time your credit score
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will rebound before long if you have any
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questions tips or horror stories about
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closing a credit card drop them in the
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comment section below for more advice
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and our list of the best credit cards on
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the market you can visit fool comm slash
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credit cards and if you haven't already
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