As strange as it seems, closing credit card accounts will actually hurt your credit score.
Why does closing credit card accounts hurt your credit score?
As crazy as it seems, the credit rating agencies like to see several open accounts with balances and payments under control.They actually penalize you if you close accounts because it now looks as though you have "less established credit" and are more of a risk! It doesn't make logical sense, but that's the credit rating/scoring game we all have to play!
For Example:
Let's say you have 5 credit cards
| Account | Credit Limit | Balance | |
|
Visa |
$5000 | $2,500 | making on-time payments |
| Master Card | $5000 | $1,500 | making on-time payments |
| Sears | $1500 | $0 | |
| Kohl's | $1500 | $0 | |
| Discover | $2500 | $0 |
As far as the main credit reporting agencies (Experion, Eqiufax, Transunion)are concerned, your RISK RATIO looks like this:
| Total Credit Available | $15,500 |
| Total Balances | $4,000 |
| Ratio | 26% |
In this example, you are a good credit risk, pay on time and therefore should have a good credit score. But, let's say you decided to cancel the Sears, Kohl's and Discover cards since they have a zero balance and you are trying not to charge up too much credit.
Now your RISK RATIO looks like this:
| Total Credit Available | $10,000 |
| Total Balances | $4,000 |
| Ratio | 40% |
Now you are a greater risk as you are using almost 1/2 of your available credit! Make sense?
What is the best way to manage your credit score and risk ratio?
It might seem foolish, but from a credit score perspective, the best way to improve your credit score is to "lightly" use several cards."Lightly" means charging less than 10% of the available credit.
Next, you need to PAY OFF THE FULL BALANCE EACH MONTH!
Sound dangerous? You are right! If you aren't disciplined, you could end up charging up your cards again. However, if you can keep on task, your credit score will improve over time.Not sure what your credit score looks like?
Go to www.creditkarma.com to see your score for free.
Want to see what is showing up on your credit report?
You can get a FREE COPY OF YOUR CREDIT REPORT FROM ALL THREE MAJOR AGENCIES once a year!
ARE THERE ERRORS ON YOUR CREDIT REPORT?
You can fix those errors and improve your credit score. Check out this post --> 3 Tips on How to Repair Your Credit Report.
