Most people don't know that closing credit card accounts can hurt their
credit score. However, according to
this article by Adam Levin, this is one of the biggest mistakes that a consumer can make.
Obviously, not paying your bills is the biggest mistake, but cancelling
your credit card accounts can also hurt you. This is because your credit
score relies heavily on positive credit histories and your credit utilization.
If you close a credit card account, then you will lose the positive credit
reporting once that account drops off of your credit report. On the other
hand, an open account will remain on your report so long as it is open.
This means that even if you do not use a card, its past positive history
will remain on your report and help your score in the long run.
Additionally, closing an account reduces the total amount of credit that
is extended to you. This may seem like an attractive idea if you are trying
to protect yourself from your spending habits -- it is hard to get into
a deep credit hole if you don't have much credit. However, roughly
30% of your credit score is based on your credit utilization -- the ratio
of debt to available credit.
This means that closing credit accounts can actually hurt your score --
by closing open lines of credit, you reduce your available credit. This
means that any debt you have has a larger effect on your credit utilization
because there is less unused credit to balance it out. Quite simply, closing
a credit card can turn a 10% credit utilization ratio into a 40% ratio.
Consumers trying to repair their credit after a bankruptcy will most likely
have very little choice about leaving credit accounts open. The bankruptcy
takes care of those accounts. However, the advice in Adam Levin's
article is good advice for the long term.
Once a consumer receives a bankruptcy discharge, new credit card offers
often follow. This is because the banks know that there are limits on
how often a consumer can file for bankruptcy; a new credit card account
will stay "on the hook" for quite some time.
As a consumer's credit improves, more credit card offers will come.
Accepting some offers makes sense because those lines of credit will add
to the total amount of credit available. So long as the balances on individual
cards stay relatively low, then the credit utilization ratio should help
improve the overall credit score.
Learning how to use credit effectively is an important skill for anyone
seeking to improve or repair a credit score. You can read more about credit repair in
this blog post and