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If you're considering closing one of your credit cards because you don't use it anymore, think twice before contacting your card issuer. While it might seem like holding fewer credit cards could help your credit, losing the available credit limit on the closed account can increase your utilization rate, which can hurt credit scores. If you're considering closing a bank account, however, be assured that it will have no direct effect on your credit. Here's what to know about how closing an account can affect your credit.
Why Closing a Credit Card Account Can Impact Your Credit
Your credit utilization ratio, also called your balance-to-credit-limit ratio, is the second most important factor in credit scores. It measures how much of your available revolving credit you're using at any given time. The lower your utilization rate, the better for your scores.
If you close a credit card account and still have balances on other cards, those balances will make up a greater percentage of your total available credit limit. To calculate your utilization ratio, divide the total of all your credit card balances by the total of all your credit card limits, then multiply by 100 to get a percentage.
Credit score experts recommend keeping your utilization ratio under 30%, and people with the best scores tend to have utilization of less than 10%.
Should You Close Accounts After Paying Off the Debt?
If you are working to improve your credit scores, it's typically best to leave your credit cards open once they are paid off. Ideally, you should keep those accounts active by making small purchases and paying your balances in full each month.
This is especially true if you are planning to take out a loan, such as an auto loan or mortgage, in the next three to six months. You'll want to keep your credit history stable until that credit transaction is complete.
When Does It Make Sense to Close a Credit Card?
Although closing your credit card account once it's paid off can cause a dip in scores, there are some instances where it still may make sense to do so. If you have more than one credit card and the account in question has an annual fee, it may not make good financial sense to continue paying for a card you no longer use.
And, if you've struggled with credit card debt in the past and leaving the account open represents temptation to charge more than you can afford to repay, closing it may be the best decision. Although your scores may decrease initially when you close an account, they typically rebound in a few months if you continue to make your payments as agreed, assuming everything else in your credit history remains positive.
If you decide closing the account is the best option, contact your lender to notify them that you wish to close it and ask whether there are any outstanding charges or fees. Also make sure you won't lose any rewards you've earned before you close the account—or try to use them first. You will also need to notify any company with whom you have set up automatic charges to that account. Finally, you should cut up or shred the card before disposing of it.
Does Closing a Bank Account Affect Your Credit?
Bank account information is not part of your credit report, so closing a checking or savings account won't have any impact on your credit history. However, if your bank account was overdrawn at the time it was closed and the negative balance was left unpaid, the bank can sell that debt to a collection agency. The company that buys the debt can then report the collection account to the credit reporting companies, which could cause scores to plummet.
When closing a bank account, you should contact your bank to ensure that all withdrawals have cleared, and that no money is owed. Take inventory of any pending payments that may not have cleared yet. Make sure to cancel any automatic payments you have set up before the account is closed.
Improving Your Credit Scores Going Forward
If you are trying to improve your credit scores, paying down credit card debt is an important step. Keeping a low utilization rate and making all payments on time are the two most important factors in having good credit scores. You can also increase your credit scores by signing up for Experian Boost™† . With Experian Boost, you can get credit for your on-time utility, cellphone and streaming services payments. Those payments can be added to your credit report going back as far as 24 months, and can increase your credit scores immediately. Signing up is free and takes just a few minutes.