Keeping or Closing a Credit Card
Will closing my Credit Card effect my credit rating?
Well the answer to this is yes, but doing the wrong thing can have an adverse effect on your credit rating. But do the right thing and your credit rating will improve!
Here we will give you a guide that will let you work out if keeping or closing your credit card is best for you and your credit rating.
- Make a list of all your credit and store cards. What you are looking for is all your “Revolving Credit Accounts” i.e. these are accounts that you continue to use whilst you pay them back. These are not like a loan, that when you have paid that off it is automatically closed. What we are talking about is; Barclaycard, Tesco Credit cards etc.
- Total the amount of limit on each credit card. This is the amount (limit) that the credit card company allows you to max out on your card.
- Make a total of the current balance on your cards. This will be shown on your latest statement.
- Divide the current balances by the limits, so if for example your current balances £4,600 and you limits add up to £20,000 then divide 4600 by 20000 = 0.23
- This now needs to be converted into a percentage, the easiest way is to ditch the decimal point, therefore 23%. However if you want to check this then you need to multiply .23 by 100.
23%: This number is your Credit Utilisation Rate (CUR)
Credit Utilisation Rate indicates how much of your available credit you use on a regular basis. The whole key to using this system is to use some of your credit but not too much! The best balance is to be using 20-30%. Credit Rating companies grade you by how much credit you use.
Approximately a third of your credit score is your Credit Utilisation Rate. Therefore if you are paying all your outstanding bills on time but your credit rating does not seem to improve, then it may be becuase your Credit Utilisation Rate is over the 30% mark.
- If the CUR is below the 20% mark, then you will need to recalculate but without including the latest card you have. This is important as the length of credit history on cards also can account for 15% of you total credit score. So it is always better to keep old cards running. Excluding the newest card redo the calculations. If your score turns out to be between the magic numbers of 20-30% then you can go ahead an close the card.
- If your CUR is between the 20-30% mark or above, then do not close any of your credit card accounts. The effect of doing this will actually increase your CUR which could in turn effect your credit rating adversely.You should though continue to pay money towards your cards and avoid using them till the CUR value comes down.
- Keep doing the above until you find out exactly how many cards you can ditch or keep just bear in mind Credit Utilisation Rate of 20-30%
- Finally keep paying down your debt to improve your credit rating even more.