After discovering that your credit score is lower than you had hoped it was, your next move would probably be to see what you can do to raise your credit score to a more acceptable level. Because you heard somewhere that having too much credit is not a good thing, you decide to close a credit card. Unfortunately, closing a credit card account may do more damage than good.
On the surface, this may sounds like a good idea, but the truth is that it can easily backfire on you and actually give you an even lower credit score. The reason for this is that your credit score is not just based on how much credit or debt you have. There are many factors that go into the calculation.
Three important factors include how long you have had credit – the length of your credit history, whether or not you regularly make payments on time, and the percentage of credit that you actually are using. One thing that surprises a lot of people is that it usually is a good idea to keep your old credit cards open, and never close them.
MyFICO, which is the official website of the three companies (EquiFax, Experian, and TransUnion) that established the FICO credit score, officially says that “we never recommend closing old or unused credit cards because this rarely helps your FICO score.”[i] Instead, they offer advice that is more apt to help you, but bringing your credit score to a more desirable level cannot be done overnight.
One way that closing an old credit card account can hurt you is if it raises your credit card utilization percentage. This is usually understood as a debt-to-credit ratio. By closing a credit card that, for example, has a credit limit of $2,000 (with no balance owed), you will actually increase the amount of debt you have by $2,000, when compared to your credit amount. This action will increase the percentage of the amount of credit you are actually using – which will probably lower your credit score, instead of raising it.
One thing that a potential lender will want to know about is how much debt you have currently. By closing a credit card and increasing your debt-to-credit ratio, this action may indicate to the potential lender that you are having difficulty handling your current debts – which may cause them to not give you any new credit.
Even when you have credit cards that you have not used for a long time, it still is not recommended that you close those credit card accounts. The reason for this is that your credit report will show that you have been using credit for that length of time – which can actually help your credit score. Closing old credit cards will indicate to potential lenders that you do not have a long credit history, which may make them rethink giving you more.
Raising your credit score cannot be accomplished overnight. Instead, MyFICO says, it is a process that takes time. They advise that the best way to raise your credit score is to do three things: pay your bills on time, pay off your debt (instead of just shuffling it between cards), and keep your balances low.