One of the biggest pieces of advice people are given about credit is to not close old accounts. But, why? Is it really true that closing these accounts can hurt your credit? In fact, it is. There are actually a number of reasons why closing an account can hurt your credit. Here are just a few of the most common reasons and why.
If you’re tempted to close an old account, don’t be. The age of these accounts can help your credit score. Lenders will look at this information when viewing your credit and will be more impressed with credit accounts that have been open for 10 years than those you’ve only had for two years. In fact, they may even wonder why you closed an older account, which can leave them questioning your credit.
Closing Too Many Accounts Can Hurt Your Score
People who are struggling with their credit are often tempted to close all their accounts and rid themselves of credit. However, this can have an extreme effect on your credit. The truth is you will be left with a ruined debt to credit ratio. You may not have any debt, but creditors will look at your history and be concerned by your lack of accounts. They will also question the need to close all your accounts and if the only answer you have is because you couldn’t trust yourself, they are not going to be happy. Banks want responsible debtors, who will pay their bills and not tack on more debt than they can handle.
The Debt to Credit Ratio May Be Affected
One thing you need to understand about your credit is that the debt to credit ratio makes up a large percentage of your score. The debt to credit ratio is the amount of debt you have in relation to the amount of credit. For example, you may add up all your credit card spending limits and have $10,000 worth of credit. However, you may have $4,000 in debt or 40%. When you close a credit card, it will affect how much credit you have, thus affecting your debt to credit ration. While 40% may have looked okay, let’s say that you close an account that has a $5,000 limit. This means you credit has dropped to $5,000, which means your debt is now 80%, which will hurt your credit score.
In most cases, it’s best to keep an account open. If you have problems with over using your credit cards, store them away where you can’t easily access them or cut them up. This will ensure that your score stays intact, but you better manage your debt.
About the Author: Christiane Skeet is an EKG technician who knows first-hand how canceling credit accounts can hurt. After ridding herself of all of her educational and spending debt, she thought closing her accounts would be the next best thing but her credit score suffered. Now she’s back on track and keeps her spending and credit in check.