The credit ratings and scores of millions of Americans are relatively shielded even if cardholders choose to close down their credit scores. According to FICO (Fair Isaac Corp.), most consumers may not see their scores go down if they decide to close some of their cards. With rising interest rates and lower credit limits, more and more cardholders are choosing to get rid of their many credit cards to avoid paying substantial card debts.
One important aspect considered by the three credit agencies, Experian, Equifax, and TransUnion in determining credit scores is the debt-to-credit ratio, also known as the credit utilization rate. This is essentially the ratio of existing card debts to the credit limits. A lower ratio would mean higher credit scores. A higher ratio, on the other hand, means a drop in the credit ratings.
Many Americans fear that by closing down their cards, their credit utilization rate would also decline, resulting in less than favorable credit scores. However, recent studies suggest that majority of adult cardholders use less than 10 percent of their credit limits. This means that closing down a credit card or two can have very negligent effect on the credit scores. Of course, they point out that this is only true for consumers who have several cards. Closing down a single credit card out of the multiple cards can have very little impact on the credit ratings. For cardholders with only one card to start with, however, this action can affect their credit scores substantially.
Consumers who own cards with high balances can also suffer from lower credit ratings once they decide to close down their credit cards. Only cardholders who have relatively low balances and low credit utilization rates can expect to see their credit scores unaffected by closing down credit cards.
If a cardholder decides to close down a credit card with existing balance, how he or she deals with the remaining debt on that card can still affect credit scores and ratings. Closing down a card is not a guarantee that the outstanding debts will be reduced, expert say. On the contrary, consumers should treat these remaining balances the same way they would treat existing balances on still active cards. Wise and responsible credit card use is still the best possible solution and prevention method for credit card debt. With proper management and use, lower credit limits should have no negative impact on credit scores and ratings, analysts point out.