Closing Accounts and Your Credit Score

Your credit score is at the center of your financial universe. Creditors use your score to determine your level of risk as a borrower. If you have a poor credit score or inadequate credit history, you may only have access to the highest interest rates and terms on credit accounts. Once you've establish credit, the best way to keep your credit score up is to avoid closing your accounts.

Credit Utilization

Your credit utilization ratio is the amount of debt you have versus your total available credit. Generally, a 30 percent credit utilization ratio and below is considered to be favorable if you want to increase your credit score each month. Your credit utilization ratio is taken into account individually and collectively. The lower your credit utilization ratio on all cards, the better your credit score. However, low does not mean zero.

Using Credit

For a creditor to assess your payment history, you must use your credit accounts. The key is to demonstrate that you can responsibly borrow and repay your debt. Closing your accounts is one way to cut off the only method of communicating your credit to a lender. Keep your account open and in use. While it is not necessary to make unnecessary purchases, use your card whenever possible to generate positive activity that can be reported to the credit bureaus.

Closing Your Accounts

Once your credit accounts are closed, your credit utilization ratio increases. For example, if you have two cards that each have a limit of $1,000 and one card carries a balance of $500, your credit utilization ratio is 25 percent. However, if you close the card with no balance, your credit utilization ratio jumps to 50 percent for your cards collectively. This causes your credit score to drop because you appear to be using more credit than when both your accounts were open.

Considerations

Credit helps you to build a positive credit rating to the extent you maintain positive activity. You may attempt to use credit to your advantage to no avail and learn that having open accounts only leads you down the path to temptation. Don't overspend for the sake of having credit accounts open. Instead, you may want to close accounts that have limits greater than you are able to repay within a few billing cycles. This can help you remain in control of your debt and spending.