When you have decided to start repairing your credit, the first thing you will go for is probably your credit card account(s). For many people, credit card accounts contribute largely to negative entries. And if you pay off the balance or cancel it completely, you figure it will be a big step in the right direction.
Should You Cancel Your Credit Cards?
No, you shouldn’t. It is a bad idea. One of the biggest determinants of your credit score is your credit history. It is, therefore, better to keep the credit account open. Holding on to the account will help you maintain your current score or improve it.
Besides, if you cancel the credit card, it will still remain in your credit report. And it will be there for ten years. It is part of your credit history which makes up 15% of your credit score.
Your Credit Score May Get Hurt If You Close Your Credit Cards
Having open credit card accounts contributes to your credit history, even when it has negative entries. It is better to clear late payments than to close the cards.
This may be confusing because closing a credit card account may seem logical. But a few months after you close the accounts, your score will most likely drop.
Why does this happen?
How you manage your open credit accounts greatly determines your credit score. If you close the account, the only thing that will matter is the history and it may not be good.
An exceptional credit score shows that you have well-managed long-term accounts.
Too many credit accounts are not good for your score. But the solution is not closing them. Rather, you should avoid opening many accounts.
So if you have an open credit account, don’t close it.
Credit Utilization Will Fall
If you close your credit cards, your credit utilization will be negatively affected. This is the percentage of available credit used. Lower credit utilization increases your score. In fact, credit utilization makes up for 30% of your credit score.
Cancelling a card lowers your available credit. And if you spend what you usually spend using your credit cards, the utilization ratio goes up.
To improve credit utilization ratio, pay off your credit card balance (or most of it) and use credit cards less.
Closing Your Credit Card Account: Alternatives
Instead of cancelling your credit card, it is better to stop using it or use it less. But there’s something else you can do. Contact your credit card company. See if they can waive your annual fee.
You can also switch to a no-annual-fee card. Everything will stay the same. The only thing you may lose is the rewards point program.
How About Reopening Credit Cards Accounts?
If you had already closed the credit card account, talk to the issuer and ask whether they can reopen it. They will definitely take a look at your report first. And they may consider if you have improved.