How Does Opting Out of Credit Card Affect Credit Score?

When a person takes out a line of credit with a financial services organization such as a credit card company, he retains the right to close this account at any time. While closing an account does not let the person off the hook for the money owed, it does prevent him from incurring additional debt on the account. This closure can affect a person's credit score in a number of different ways.

Closing An Account

When a person chooses to close an account, it is the same as canceling the account. The borrower forfeits the right to continue to loan money from that line of credit but is still obligated to pay the money that he has borrowed, at the terms that were previously set. When an account is closed, the lender will report the closure to a credit reporting bureau, which will use the closure of the account to compute a new credit score.

Debt-to-Credit Ratio

One of the main variables that affect a credit score is a person's debt-to-credit ratio. This is the ratio of the amount of outstanding debt a person currently has to the amount of available credit he currently has So, a person who owes $1,000 on an account with a $3,000 limit has a debt-to-credit ratio of 1 to 3. The higher the ratio, the lower a person's credit score

Credit Score Effects

When a person closes an account, his debt-to-credit ratio rises, as the debt from this account remains, while the credit available to him drops. In some cases, this number can skyrocket, especially if the person has no other additional credit available to him. This drop can lead to a severe drop in the person's credit score. However, if a person has significant sources of additional credit available to him, the drop may be relatively small.

Advantages

Although a person's credit score may experience a short-term drop after an account is closed, the closure may lead to a long-term improvement in the person's score, particularly if the person is in the habit of incurring debt. If an account is closed, a person will not longer be able to take out new loans on that account. That limits the amount of debt he can take on, thereby limiting the damage he can do to his credit score.