In the continuing debate over the actual effects of shutting down card accounts, financial analysts share their insights on the issue. The ongoing economic crunch is making more and more Americans wary of how they use their credit cards. Recent surveys have shown that more cardholders are cutting back on their use of plastic, with a growing number of consumers closing down card accounts to avoid mounting debts. Nevertheless, many cardholders are still confused about the potential effects their actions may have on their credit scores.
Credit experts say that closing down card accounts, whether they are old or new ones, does not have a significant impact on credit scores and histories. Craig Watts, the public affairs director for Fair Isaac Corporation (FICO), says that because credit ratings include both old and newer credit card accounts, getting rid of any of the cards will not affect the cardholders' scores in a big way.
Getting rid of a relatively old credit card account will not affect the length of a cardholder's credit history. Neither will it erase any records of late payments. On the other hand, paying regularly and on time can help consumers maintain considerably high credit ratings.
Even so, closing a card can result in slight drops for credit scores, experts warn. One important factor that credit agencies look for is the consumer's utilization rate. This rate is the ratio of outstanding balances to the available credit provided by card issuers. A lower utilization rate means higher credit scores while a higher ration can automatically mean a decline in ratings. Analysts explain that cardholders need to be aware that the utilization rate is not computed on a card-to-card basis. Rather, the credit bureaus sum up all the balances and the credit limits to come up with an average. This average ratio then becomes the utilization rate.
Closing down a card does not necessarily mean getting rid of the balances in the particular credit card. On the contrary, experts say, the balances in the closed cards still affect credit ratings significantly. To avoid worsening debts, credit specialists' advice cardholders to pay off all debts associated with a certain card before getting rid of it. It would also be beneficial for consumers to close down cards with relatively low balances to avoid risking lower credit ratings. Cancelling cards with higher credit limits can also result in a sudden drop in credit scores, leading to fewer financial opportunities.