To keep a solid credit score, many people are being careful with their financial choices. One major consideration is whether to close old credit accounts, which can significantly impact your credit history and score. A lot of folks don’t realize that shutting down these accounts can hurt their credit score, so let’s dive into the details.
Effect on Credit History
When someone decides to close an old credit card or personal loan account, they also eliminate the record of their timely payments from their credit history. One key factor in determining your credit score is how consistently and for how long you’ve made your payments on time. Keeping a good credit track record over time boosts your score, making it easier to secure loans in the future. By keeping your old accounts open, you add positive information to your credit report, showcasing your reliability to lenders.
Why Closing a Credit Card Can Be Detrimental
Closing an old credit account reduces your total available credit limit. If your spending habits stay the same, this can lead to a higher credit utilization ratio, which can negatively affect your credit score. Experts suggest keeping this ratio below 30%. For instance, if your credit limit is Rs 1,00,000, you should aim to keep your credit usage under Rs 30,000.
Temporary Decline in Credit Score
Often, closing old accounts can cause a short-term dip in your credit score. This happens because it lowers the average age of your accounts, which can weaken your credit history. Additionally, if you’ve opened several new accounts recently, it might signal to lenders that you’re financially unstable, which can further diminish their trust in you.