This seems like a contradiction, but it really is not. Many people think that to improve their score, they just have to pay off some debts and close their accounts. This is not exactly accurate. There are several reasons to think carefully before closing your accounts.

First, if you close an account you need (for example), or if you close all your card accounts, then you will have to reapply for credit to begin building it again, and all those inquiries from lenders will cause your score to actually drop.
Secondly, most bureaus give high favorable points to those who have a good long term credit history. That means that closing the account you have had since college may actually hurt you in the long run. If you have credit accounts that you don’t use or if you have too many credit lines, then by all means pay off some and close them. Doing so may help your score - but only if you don’t close long-term accounts you need. In general, close the most recent accounts first and only when you are sure that having them is too problematic for your financial health.
Closing your accounts is a bad idea if:
1) You will be applying for a loan soon. The closing of your accounts will make your score drop in the short term and will not allow you to qualify for good loan rates if your utilization spikes.
2) Closing your accounts could make your overall debt balance too high. If you owe $10,000 now and closing some accounts would leave you with only $1,000 of available credit, it will look like you are now close to maxing out your credit - which gives you a bad rating.
In short, closing accounts may lower your score due to utilization, but in the long run it can be beneficial if you find that those accounts are too much of a temptation to spend money beyond your means and overextend yourself.
If you need help on deciding which first step to take to start improving your credit, download our FREE credit road map at kromacredit.com.
Comments