We’ve blogged here before about all the factors that affect a credit score, but there may be one more that needs to be looked at. Many consumers may have credit card debt that they transfer from different accounts because of balance transfer deals and many other consumers open new accounts just for the bonus points on that card. We have already looked at how opening a new credit account may negatively affect a credit score, but some consumers are concerned that closing a new account may cause the same damage.
We know that the age of an account often affects a person’s credit score, with the oldest accounts showing a positive record and benefiting the credit score and the newest accounts damaging the credit score. So if that is the case, then what happens if you want to close and account shortly after opening it?
Well the answer to this pressing question is simple! Many consumers don’t realize this but our credit accounts will continue to appear as long standing accounts on your credit score, even after they’ve been closed! “You still get the value of the age of the account whether it’s open or closed, active or inactive, balance or no balance,” said John Ulzheimer, the president of consumer education at SmartCredit.com. So even if you close a brand new credit line it may still continue to earn points for your credit score! The damage that would occur in this situation is in opening a new account.
But there is one other factor to closing a credit account that may affect your credit score. We discussed in our Credit 101 article how FICO looks at the total available credit that a consumer has and calculates how much of their credit is being used. If the account in question had a high credit limit and a low balance, this could severely impact the consumer’s credit score- in a good way! If the account is kept open, it is more likely to help your credit score by increasing your credit utilization rate. But you should be careful! Always make sure that you weigh the pros and cons of keeping open an account that is no longer in use. The account may have a high annual fee, and if that’s the case then it may be more beneficial to go ahead and close the account. After you factor in the costs of keeping your account open, you can more accurately determine which would be the smarter financial move.
Keep in mind that consumers who have very positive credit scores usually use less than ten percent of their total available credit limits at any given time. And even if you don’t feel like you need the help of this card to bolster your credit utilization rate, think again. Even if you don’t need to build your credit score right now, the sudden loss of available credit when you close an account could mean bad news for your credit score.
Also be sure to keep in mind that eventually closed accounts will disappear. Closed accounts are taken away from your credit score ten years after having been closed. This means that you may want to strategically close your accounts to get the best possible credit score. Waiting until you have a few other open accounts where the credit utilization rate is not so high may be a good idea. That way the sudden loss of available credit may not affect your score too harshly.
If you would like more information about how to improve your credit score by having an auto loan, please visit our contact us page or call 866-442-0871 to find out how we can help you get a new car loan!