Does Closing Out Your Credit Card Account Ruin Your Credit?
The burden of managing due dates, interest rates and fees may tempt you to close your credit card account once the balance reaches zero. However, there are advantages and disadvantages to closing your credit card account. You should weigh your options based on your credit goals.
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FICO Score
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Credit scores help determine whether you can obtain credit. With a high score, you qualify for more loans, and the interest rates on loans and credit cards will be lower. Your credit score is determined by a range of factors, but the two with the most influence are payment history and amounts owed. Together these two categories account for 65 percent of your credit score.
Amount Owed
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When your credit card balance reaches zero, your credit score increases. However, when the account is closed, your available credit decreases and that causes your credit score to drop. A credit utilization ratio is the amount of debt you have relative to your available credit. When you have a high credit limit, but you choose not to use much of the available credit, you have a low credit utilization ratio and are considered to be a responsible borrower. That increases your credit score. The available credit is considered for all accounts you have open, which means that closing one account lowers your available credit overall.
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Payment History
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Closing a credit card account once the balance reaches zero can mean ridding yourself of the opportunity to increase your credit score each month. Payment history is the largest factor used to calculate your credit score. Charging small amounts to your credit card and paying the balance off in full each month results in a positive report being sent to the credit bureaus each month.
Relieving Temptation
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If you have a history of poor credit management, closing a credit card account may be worth dropping a few points in your FICO score. With the balance at zero, you may be tempted to use credit you are unable to pay off in a short period of time. Being unable to pay off the entire debt each month will increase the amount of interest you owe.
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