Myth: Closing Credit Cards Will Improve Your Score 

Many people believe that closing credit cards will improve their credit score. This myth, however, can lead to misguided actions that may harm your credit. Understanding how credit scores work is crucial to making informed financial decisions. Here, we will explore the effects of closing credit card accounts on your credit score and provide actionable insights to help you manage your credit responsibly. 

Understanding Credit Scores 

Credit scores are calculated based on several factors, including payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries. Each of these factors plays a significant role in determining your overall creditworthiness. Closing a credit card account can impact multiple aspects of your credit score, potentially causing more harm than good. 

Impact on Credit Utilization 

One of the primary components of your credit score is credit utilization, which is the ratio of your total credit card balances to your total credit limits. A lower utilization ratio indicates responsible credit management and can positively impact your score. When you close a credit card, you reduce your total available credit, which can increase your utilization ratio if you carry balances on other cards. For example, if you have two credit cards with a combined credit limit of $10,000 and a total balance of $2,000, your utilization ratio is 20%. If you close one card with a $5,000 limit, your available credit drops to $5,000, increasing your utilization ratio to 40%, which can negatively affect your credit score. 

Effect on Length of Credit History 

The length of your credit history accounts for 15% of your credit score. This factor considers the age of your oldest account, the age of your newest account, and the average age of all your accounts. Closing an old credit card can shorten your average credit history, especially if it is one of your oldest accounts. A shorter credit history can signal less credit experience and stability to lenders, potentially lowering your credit score. 

Changes in Credit Mix 

Having a diverse mix of credit accounts, such as credit cards, mortgages, and auto loans, can positively influence your credit score. Credit scoring models favor borrowers who can responsibly manage different types of credit. Closing a credit card can reduce the diversity of your credit mix, which might negatively impact your score. 

Tips for Managing Credit Cards 

Instead of closing credit cards, consider these strategies to manage your accounts effectively: 

1. Pay Off Balances: Focus on paying off your credit card balances while keeping the accounts open. This will help reduce your credit utilization ratio and improve your score. 

1. Use Cards Sparingly: Use your credit cards for small purchases and pay off the balance in full each month to keep the accounts active and demonstrate responsible credit use. 

1. Monitor Your Credit: Regularly check your credit reports and scores to stay informed about your credit status and detect any errors or fraudulent activity. 

Conclusion 

Closing credit card accounts may seem like a straightforward way to improve your credit score, but it can have unintended consequences that harm your credit health. By understanding the factors that influence your credit score and managing your accounts wisely, you can take positive steps toward achieving and maintaining a strong credit profile. 

Gavin Symes MBA, Dip FS (FP)

Gavin holds an MBA and a Diploma in Financial Services (Financial Planning). He has been a driving force behind the growth of Credit Repair Australia since its inception in 2003.