If you’re fortunate enough to have significant credit available for your use but don’t really use all of it, that’s a clear indication that you are capable of responsibly managing your debt-load. This will positively impact your credit score. But if you close your credit card accounts, your debt-load, otherwise known as credit utilization ratio, might rise and, consequently, your credit score might fall.
Why Closing Your Credit Card Account is Not a Good Idea
Gethomefinancing.com says your FICO credit score is your single most important asset. Your credit card balance affects your home purchasing capability. For instance, let’s say that you own two credit card accounts; one has zero balance and a $5,000 credit limit, while the other has a $10,000 balance and a $15,000 credit limit, and you’re utilizing 50% of your total available credit. This means that your total balance is $10,000 and your total limit is $20,000. You then close the card with zero balance, still leaving you with a total balance of $10,000, but a reduced total limit of $15,000, which means that you’re now utilizing 67% of your total available credit.
The Impact of Closing an Account
Since your first credit card (the one you closed) had zero balance, your total balance wasn’t affected. But that card provided a $5,000 credit that factored into your total limit. When you closed that credit card, that $5,000 was also subtracted from your total limit, which in turn resulted in a higher proportion of used credit to available credit. And this may reduce your credit score.
If you really feel that you couldn’t be trusted with too much credit, since you might be tempted to go overboard and use all your available credit, you might consider closing one account. But take note that there are other ways to avoid overspending, especially if you’re planning on applying for a mortgage in the near future, advises a mortgage broker in Fort Myers.
Because closing a credit account might reduce your score, consider not using your card at all. Hand it over to your partner, a trusted family member, or a friend. You could also freeze it in a block of ice (yes, plenty of people actually do this!), or simply cut one or two of them so you can’t use them.