Owning a credit card comes with great responsibility because a credit score relies on various components like payment history, length of credit history, utilization ratio, etc. If you manage these components appropriately, then you’re able to land yourself a good credit score. A good credit score is essential to receive the best interest rates and ultimately save money on large and small purchases.
Closing a credit card won’t necessarily impact your credit score, but your length of credit history will be affected. At Credit360, we don’t believe that credit cards are neither good nor bad. We prioritize our clients and put their needs above all else. If closing your credit card is necessary to help your financial situation, please do so. Our credit repair consultants merely want to inform you how closing a credit card can impact your credit score with this blog.
Contents
- What is Length of Credit History?
- Example
- How Does Closing an Account Affect Credit Score?
- What If I Have a Bad Credit History?
What is Length of Credit History?
Length of credit history refers to how long each credit account you own has been open. The length of credit history is also one out of five components that determine your credit score. Although the length of credit history is not measured highly as payment history, closing an account affects two parts: credit age and credit utilization.
While the length of credit history measures the length of each open credit account, credit age measures the average length of all open accounts. The credit age is calculated by adding the age of all accounts and dividing them by the number of accounts owned. Refer to the example below:
| Credit Cards Owed | Age Type | Length of Credit History | Credit Age |
| Credit Card 1 | Oldest | Open 7 years | |
| Credit Card 2 | Old | Open 5 years | |
| Credit Card 3 | Newest | Open 11 months | |
| Length of Credit History | 7.6 Years |
On the other hand, credit utilization measures the amount of credit you own across all accounts in ratios to the amount of credit used across all accounts. For example, if you own five credit cards, each with a credit limit of $1000, in total, you own $5000 worth of credit. And if you used $500 from each credit card, you used $2,500 worth of credit in total. Hypothetically, this credit utilization would be 2500:5000. To learn more about credit utilization, check out our blog: “5 Factors That Make Up a Credit Score.”
How Does Closing an Account Affect Credit Score
When you close a credit card, two components that make up your credit score are affected: credit age and credit utilization.
When an account is closed, the credit age is shortened, impacting your credit score. Suppose you own an old credit card account that you responsibly manage by making total payments on time. This credit history will help boost your credit score. Also, credit age shows lenders that you can successfully manage an account over time.
But when an old account is closed, the credit age is determined by newer accounts, which is hard for lenders to determine if you are a trustworthy borrower.
Additionally, the credit utilization ratio decreases when an account is closed, impacting your credit score because the amount of available credit is lowered against a high credit utilization. However, you can easily prevent this if you pay down balances on your open accounts before closing an account.
What If I Have a Bad Credit History?
Suppose you have an old account with a negative payment history that you want to close. It is advised not to close the account until you repay the balance in lump sum or payment instruments. Once you pay the balance in full, proceed with closing the account. Alternatively, if you choose to keep the account open, you can rebuild your negative payment history by responsibly managing the credit card.
However, suppose you have an old account with a negative payment history, and you already went ahead and However, suppose you have an old account with a negative payment history, and you already went ahead and closed the account. Your account will likely be flagged on your credit report as delinquent, which stays on your report up to seven years, according to Equifax. That’s when we at Credit360 can help remove negative statements from your report to help build your credit!
Written By: Indojaa Sathiyaseelan
