The effects of closing an account

When you close an account or tradeline, you retain the age of that tradeline for 10 years. But, you could still be negatively impacted by a closed account.

For instance, closing a credit card will result in a higher utilization rate due to the credit limit from the closed account no longer being a part of your total credit card limit. Let’s consider the following scenario:

• You have a Visa and Mastercard, each with a $1,000 limit
• You only have a $250 balance, which is on the Visa card
• Your credit card utilization rate would be 12.5% ($250/$2,000)

If you close the Mastercard, your utilization rate would be 25% ($250/$1,000), which is really close to the recommended max utilization rate of 30%. This will not give you much room for spending. If you go over 30%, your score will likely decrease. It’s also possible that your lender may take adverse action and lower your credit limit or close your account. The odds of adverse action are likely low and dependent on your lender’s guidelines and your overall status with the lender. You can contact your creditor to determine their general guidelines for taking adverse action.

There are also other factors to consider before closing an account, such as the account type. Your Credit Mix is 10% of your credit score. The Credit Mix is a reflection of the variety of credit that you have (revolving or installment) and how well you manage it. Continuing with the previous example, if your only tradlines consist of two credit cards (revolving) and a home loan (installment) and you decide to close both of your credit card accounts, you are likely to lose points for your Credit Mix, which will now consist of just an installment tradeline (your home loan).

So, what would be a practical reason to follow through with your plans to close an account? The biggest factor would be money. If you’re already considering closing an account and you’re actually paying a fee for the card, this could be a good reason to part ways with the card. However, if you use the card enough that you’re able to recoup fees back through credit card rewards, it may be advantageous to keep the card.

Before closing an account, weigh your options and consider how the closure will affect you. It would also be a good idea to contact the creditor to see if they can provide an incentive to retain your business. Some creditors, like American Express and Capital One, have been known to offer retention offers, such as reduced lowered annual fees.

After weighing your options, if you still desire to close the account, plan the closure. As mentioned above, the loss of the account is likely to affect your score, so plan accordingly. As a few examples, for accounts that you’ll retain, you should consider what your utilization rate will be once the account is closed. If necessary, lower balances on those accounts and/or request a credit line increase to lower or avoid any negative impact of the account closure.