Credit Restoration: Does Closing Credit Accounts Help Your Score?
One of the most common mistakes made by people trying to restore credit is to close out all or most of their revolving credit accounts, like credit cards. The logic behind this is fairly simple, the less outstanding credit you have means the less outstanding debt you have; therefore many people assume that closing out credit accounts will result in improving their scores. In reality, not only is this not the case, but closing your revolving credit accounts – especially those that have been open for a long time – actually hurts your credit rating.
After your payment history – the record of your making all your payments in full and on time – the next most important factor taken into consideration when determining your score is your credit utilization ratio. This is the ratio of credit you have actively used against the amount of credit you have immediately available. So if you only have one revolving credit account – a credit card – with a $10,000 limit and you have only used $1,000 it looks much better than having an available credit line of $10,000 and having already used $9,000 of it. For your credit score, all of the available credit is added together and all of your debt on those credit lines is added together to determine your credit utilization ratio. This then comprises approximately thirty percent of your overall credit score.
What this means is that when you close out a credit line, you lower the amount of credit immediately available to you. This is then held against you as in makes your standing credit utilization number look worse, not better. Being aware of this can help people working on fast credit repair. While you should certainly pay down – or even pay off – as much of your revolving credit debt as you can; afterwards you should keep the revolving credit accounts open. This is particularly true for older credit accounts, because the value of a revolving credit account to your credit report improves the longer it is open. Avoiding this common misconception and mistake will usually help you improve your credit score much quicker.
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