If you have a $0 balance card, should you close it before applying for a mortgage? That’s a good question, but before you consider canceling your credit card account, it’s crucial that you know the potential drawbacks associated with closing an account.
For example, did you know that closing a credit card has the potential to subtract points from your credit score?
This information is critical to understand because a low credit score might make qualifying for a loan challenging, especially if your credit is near a lender’s cutoff. That’s why you have to think twice before dropping your account.
Here’s what you need to know about how closing credit cards can affect your score.
Your credit utilization ratio is the money you owe on your credit card divided by your credit limit and it accounts for 30% of your FICO score.
Decreasing the amount of credit available to you by canceling your credit card account could cause your credit utilization ratio to increase, which will hurt your credit score. Lenders deem borrowers with high credit utilization ratios as red flags since it informs them that they’re using a higher amount of their available credit.
Your credit history is worth 15% of your FICO score. While calculating your FICO score, credit bureaus take your length of credit history into account. When you cancel your oldest account, you shorten your credit history. This negatively affects your FICO score.
When you cancel your credit card account, you wouldn’t be able to enjoy the rewards, loyalty points, and other benefits you usually get on the card. Besides missing out on the benefits mentioned earlier, your overall credit limit will also take a hit.
Paying off your credit card debt is much better than closing it. You can keep it open without using it; this way, your credit card remains on your credit history and shows lenders that you can handle your finances efficiently. This helps you build both credit and credit history.
Canceling your credit card account may give you peace of mind, but it can negatively impact your credit score. That’s why you have to think twice before closing your credit card account. If you still want to close some of your cards, close the newer ones so that your credit history won’t take a huge hit.
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