Closing Out a Credit Card – Does it Damage Your Credit?
So your credit score in unfavorable and you want to get your finances in order. However, credit repair is a big part of getting your FICO score back in favorable order. So what’s there to do?
To put it simply, there is not one tried and true “fix” to turn your credit score from poor to stellar over night. No, instead you need to take a look at the areas where your credit score is lacking luster and then make appropriate changes, whether in regards to debt management, making on-time payments, etc.
But one way people think they can magically improve their credit score quickly is by closing out credit card accounts. This is what we like to call a “repair credit no-no” when it comes to upping your FICO score. Here’s why:
- Your FICO score takes into consideration what’s called a “credit utilization ratio.” Simply put, this takes into account your total credit amount versus the amount of credit that is currently being used. Generally speaking, you want to keep this credit utilization ration around 30 percent, meaning that you’re only carrying a balance at or below 30 percent of what your total limit is, for the best possible score.
- If you close out a credit card, you’re also eliminating parts of your total credit amount. Say, for example, you have two credit cards. Between the two of them, you’re at a 30 percent credit utilization ratio. You close one of them, thinking it will help, except now your credit utilization amount will rise about 30 percent, hurting your FICO score.
So if someone offers “closing out a credit card” as one of their credit tips, don’t be fooled. The best way to repair credit is to simply make on-time payments, enact debt management strategies to pay down loans and credit card debt and be mindful of the types of accounts you open.