Q. My credit score has always been very good, but now I’m thinking of canceling some of my cards because I don’t need all the credit I have and I want to minimize the chance of fraud. How much will this hurt my credit score?
A. In the wake of the Equifax data breach, we’re glad that you’re looking at your personal situation and considering your vulnerability to fraud.
Closing your accounts will have an impact on your credit score.
Let’s get into why.
The oldest account often serves as a marker for your credit history, said Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna.
So closing older accounts will cause your credit history to appear shorter, which may harm your credit scores.
Plus, Meckler said, closing multiple accounts at once could look suspicious to creditors. It could also magnify some of the other negative effects of just closing one account, he said.
“If you still want to cancel numerous credit accounts, then spacing the closures over time could reduce the impact to your overall credit score,” he said. “Closing a credit card won’t impact your average age of accounts right away as closed accounts remain on your reports for seven to 10 years.”
Meckler said if you close a card that is significantly older than your other cards, it could lower your average age of accounts after that initial period. While your average age of accounts isn’t typically the most important factor used to calculate your scores, he said, it does matter. If it falls, it can negatively impact your credit score.
What is important is your credit card utilization rate, which is the ratio of your credit card debt to your total credit card limits.
“When you close a card, you reduce your overall available credit,” he said. “Unless you also cut back on your spending, this can increase your credit utilization rate.”
Meckler said many scoring models take your utilization rate into account, as it’s a quick and easy way to gauge how you’re managing your credit and whether you’ll be able to pay off your debts in the future.
If you keep your overall credit utilization below 30 percent, it typically shows lenders that you’re using credit, but not dependent on it, he said.
“The bottom line is if you’re looking to close an account, it’s best to do so mindfully,” Meckler said. “Be sure to educate yourself on how your credit score may be impacted so that it doesn’t come as a surprise.”
And once you’ve decided to take the plunge, be sure to monitor your credit reports to ensure your information remains error-free.
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