If one wishes to maintain a healthy credit score, then closing credit card is a bad option. So the obvious answer here is – “NO”
Let’s commence with how is your credit score calculated?
- 35% is your credit history
- 30% is the debt ratio
- 15% is considered as the average age of the account
- 10% is taken as the type of accounts you own
- 10% is enquired of new credit
Let’s take an example. You currently hold three credit cards, and all have a limit of Rupees 10,000/- in each. Since you owe 1/3rd of what is offered, your debt ratio is 33%. If you choose to put all your balances to one single card, the result will be so –
- The debt ratio augmented to 100% from 33%. This is because your available debt is Rupees 10,000/- and you owe Rupees 10,000/-. That’s 30% of your credit score. This is sufficient enough to drop your score drastically.
- Most often, credit cards are one of the oldest open accounts because there are no such rules that one has to pay a stipulated amount no matter what the situation is, and if you close a long open account, then you are reducing the average age of your account.
Hence, credit cards have the maximum capacity of ruining your score to a greater extent. Closing a credit card is certainly a bad idea unless you have 10-12 years of good credit history.
A number of people usually panic by the fact that they have too many credit cards, and they are hurting their score. However, the fact is that there is no harm in having multiple cards. On the contrary, if you are holding a card with very high fees, then here’s how you can get rid of the same without having a negative impact on your credit score.
Ensure that the debt on that card is extremely low. Try making it 20% of the combined limit. If your score is above 640, then call the credit card companies and request them to increase the credit limit on your card.
Considering the same example – You are holding three cards currently, each with the limit of Rupees 10,000/-. If you request to increase the limit of two cards and are able to get Rupees 15,000 of each, your debt ratio does not get affected when you plan to close the third one. This might affect your score slightly because you are reducing the average age of your account, but it will certainly not drop the score drastically.
So, the main question from where we began – “Should One Ever Close His Credit Card?” The simple answer is “NO”, but if the card fees are taking a toll on you, then learn smart ways to tackle the same.
Understand the tactics of the credit world… It’s worth it!!