Credit Utilization: A Key Factor
When you close a credit card, one of the first things that can change is your credit utilization ratio. This ratio represents the amount of credit you’re using compared to your total available credit. Maintaining a lower utilization ratio is beneficial for your credit score. By closing a card, you effectively reduce your available credit, which may cause your utilization percentage to spike. This spike can lead to a decrease in your credit score.
The Age of Your Credit History
Another crucial aspect of your credit score is the age of your credit accounts. Closing an older credit card can shorten your average account age, which may negatively impact your score. Creditors like to see a long history of responsible credit use, and by closing a card, you could be jeopardizing this perception. It’s important to weigh the age of accounts against other factors before deciding to close one.
Potential Impact on Your Credit Mix
Having a diverse mix of credit accounts, such as credit cards, auto loans, and mortgages, can positively influence your credit score. Closing a credit card may reduce this variety, which can also hurt your score. Therefore, if you are considering closing a credit card, think about how it will affect your overall credit mix and whether it will leave you with a balanced portfolio of credit types.
Here’s a quick overview of how closing a credit card can affect your credit score:
- Increased Credit Utilization: Less available credit can lead to a higher utilization ratio.
- Reduced Average Age: Closing older accounts can decrease your average credit age.
- Impaired Credit Mix: Fewer accounts can lead to a less diverse credit portfolio.
Disclaimer
This article has been created or edited with the support of artificial intelligence and is for informational purposes only. The information provided should not be considered investment advice. Please seek the support of a professional advisor before making any investment decisions.
