The Effects of Closing Credit Cards on Your Credit Score

Everyone worries about their credit rating. People are worried about making any sort of moves with canceling credit cards, as they don't want to cause a negative mark on their credit. Believe it or not, having a credit card with the full amount of credit available to you is actually worse than closing out a credit card account.

There are many different types of credit cards that can have a positive effect on your credit rating when they are paid off in full and then canceled. If you are looking to really make a difference in your credit score, start by paying off your store credit cards, such as department stores and gas cards. Once they are paid off, close those accounts. These accounts are usually small, but the action of closing the account demonstrates to the credit companies that you are being responsible with your money. Your credit score can jump upwards of seven points just by paying off and canceling a store-specific credit card.

Credit card companies used to smile upon people that had a large amount of credit available on their major credit cards. Now, however, large amounts of available credit are actually looked upon as a liability. Because of this, that credit is interpreted as potential debt, and might effect the debt-to-income ratio calculations by the credit bureau. Closing a major credit card might improve your score a little because the debt-to-income ratio isn't so vast. Consider consolidating all of your credit card debt on one card, then closing out the others. This will not only improve your credit score, but make it easier to pay your lump sum credit card debt down with one monthly payment. If your credit card is paid off, cancel the account if you know that you aren't going to need it in the future.

Credit cards function as a means to pay for items without carrying cash. They also function as a way for the credit bureaus to evaluate your behavior with credit as well as monitor your payment habits. Your credit score is formed predominantly from your behavior with credit cards.

In theory, credit cards are supposed to be completely paid off at the end of the month. If the balance isn't paid in full, the debt rolls over to the following month and accrues interest and finance charges for the credit card company. Making on-time payments as well as payments over the minimum payment due will increase your credit score. If your balance rolls over without receiving the minimum payment due, a negative mark will appear on your credit score 30 days after the payment is reported late. If your balance is paid in full, the potential debt is also apparent to the credit bureau. Because of this, a different opinion may be made about your credit rating. Rather than potentially having a detriment to your credit score, you may as well close the card. Another option is to keep a low, manageable balance that you can pay off every month. This demonstrates that you can manage debt, and will increase your credit score.

Once you close a credit card account, you must re-apply to get a new card. It is a rumor that your credit score takes a hit of seven points every time your credit is run. It takes about nine credit card applications for your credit score to drop one point. Do your research before closing your credit card accounts. Call the issuer and ask them what the benefits are of keeping a card open.

When you reapply, you will most likely be treated like a new customer. You might not end up with the same credit limit that you had before. Weigh the pros and cons of closing the credit card account before you do so. It is always a good idea to keep one major card with a low or no balance, just in case of emergencies. Be sure, however, that it doesn't get canceled by the issuer because it has not been used.

Keep in mind that closing credit card accounts does not erase poor credit history. Poor credit history can stay on your credit for up to seven years.

Many people think that closing a bunch of credit cards will clean up their credit score. This is not the case. While there may be a small boost when the cards are closed, the credit rating will not increase over time. Re-opening credit accounts or applying for new ones will cause your credit score to either plateau or dip. The best way to increase your credit score is to pay your bills on time.

If you plan on taking out a big loan, such as a car loan or a mortgage, it is important to make monthly payments on time to your creditors to demonstrate good credit practices. Do this for about 4 - 6 months before applying for the loan. Prepare yourself before applying by padding your credit score.

Having too many credit cards and available credit can effect whether or not you are approved for large loans. If you are going to close out your credit cards, start with the newer ones first. The credit bureaus take the age of your lines of credit into account when calculating your credit score, and prefer to see older lines of credit than newer ones. A longer credit history shows more habits with your money and payments, which gives them a better way to formulate a higher score.