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Topics addressed on March 19, 2008:
Is it worse for you or your lender to close an account?
I have two credit cards which I use responsibly, and one which I don't use at all. I was notified by the one I don't use that the account will be closed next month. Will this have a worse effect on my credit report than if I call them and cancel it myself first?
In the past who closed the account – the lender or the consumer – was very important. That is no longer the case today.
When a creditor closed the account it used to indicate that there were problems with repayment. Either the account was late or never paid at all, or the balance was bouncing against the limit and the consumer was on the verge of disaster.
Today, people open and close accounts frequently to take advantage of better terms that include higher limits, lower interest rates, no fees or any number of other benefits.
The practice is sometimes called credit surfing, and it caused a fundamental change in the impact of closing accounts and what it means. Essentially, who closed an account is no longer meaningful as an indicator of credit risk and is not considered in credit scores.
A person’s balance-to-limit ratio, also called your utilization ratio, is much more important today. That is what you should consider when deciding to close the account you don’t use. If you close the account you will lose some of your available credit limit. That could make your overall balance-to-limit ratio appear to be much higher, which could negatively impact your credit scores.
However, that impact could be very small if you manage your existing credit well, which it sounds like you do. If you already have very good credit scores, closing the account probably will not cause your scores to drop significantly or to a point where it will affect your ability to get new credit at a good rate when you want to apply.
If you have marginal credit, an increase in your utilization ratio as a result of closing the account could put you at risk of being declined or paying a higher rate.
If you really don’t know where you stand, it might be worthwhile for you to invest in a subscription to Experian’s Triple Advantage credit monitoring service. It includes a credit score illustrator that you can use to get an idea of what will happen to your credit score if the account is closed.
Thanks for asking.
- The "Ask Experian" team