If I haven’t mentioned it already, you should know that I’m a huge fan of the Kardashians. Most people would be ashamed to admit it, and after this post I’m sure a few people won’t admit to knowing me, but Keeping Up with the Kardashians is one of my very favorite TV shows.
One of the show’s most controversial characters is Scott Disick, the hilariously obnoxious boyfriend of one of the Kardashian sisters. But when it comes to personal finance, Scott is not someone you should imitate. I have a tendency to make some pretty pricey impulse buys myself, but on one episode of a Kardashian spin-off, Scott purchased a $270,000 Rolls Royce Phantom on a whim. (For more celebrity financial blunders, check this out!) I know that reality TV isn’t always “real,” but you have to wonder what kind of credit lines these people have to be able to make such insane impromptu purchases.
None of my credit limits are high enough to purchase a new car, let alone a Phantom. In fact, my biggest credit purchases usually don’t top $100. And while I’d love to have the kind of buying power that the Kardashians have, sometimes I think I have too much credit. I currently have a Discover Card, a Visa Card, a store credit card, and my trusty debit card. Ideally, I’d like to have just one credit and one debit card. So this got me wondering: What would happen if I closed one or two of my credit cards? Does closing a credit card hurt your credit?
What happens to your credit score when you close a credit card? Closing your credit account:
- Won’t improve your credit score.
- Won’t necessarily hurt your credit score, either.
So how can you keep the card from hurting your score? To figure this out, we need to learn a little bit about credit utilization.
A good rule of thumb is that you should never use more than 30% of your available credit. When calculating your credit score, the ratio of your balance to your credit limit is a big factor. So what does this actually mean? If, for example, you have $5,000 of credit across all of your accounts, you should never use more than $1,500 (30%) of your credit. Using more than $1,500 of that credit will negatively impact your credit score.
So how does this come into play when you’re thinking about closing an account? Say you’re using $1000 of your $5,000 available credit; that’s 20%, so you’re still in the safe zone. If one of your cards comprises $2000 of that available credit, and you decide to shut that card down, you’ll now only have $3,000 of available credit. And if you’re still using $1000 of that $3000, that’s 33% – which is more than what you should be using, according to our golden rule.
That’s not to say that shutting down a credit card will always have a negative impact on your credit score. If shutting down the credit card won’t force you to be using more than 30% of your available credit, then go ahead and do it. For example, in the situation we just talked about, if you had been carrying a $900 balance instead of a $1000 one, you would have been safe. So just remember that if you can close an account without topping that magical 30% number, then you’re good to go!
The bottom line is that you don’t need to be afraid of closing your credit card. Closing a card doesn’t automatically mean that your credit score will go down. If you’re thinking about shutting down an account, take a good hard look at your credit utilization first. Carefully evaluating your situation and knowing the numbers is the best way to get rid of unwanted credit cards without letting your credit score take a plunge.