How bad does it hurt my credit if I close a credit card?[ Edited ]
I am your average joe, that loves to pull out a credit card and just use it even when I know that I have a struggle to pay it off. My question for you, is how bad does it hurt if I close a credit card once it is paid off? I am at that stage where I need to just stop and have no ideas where to begin. I just want to be debt free as soon as possible
Congratulations on reaching a mental turning point with your finances! You know what they say…the first step to fixing a problem is to admit that you have one. Now that you’re done using your credit card, let’s look at your question of how bad it will hurt your credit score if you close it.
(Exact) Impact Unknown
In short, there’s no way to know in advance the exact impact of closing your card…believe it or not. Since everyone’s credit profile is different, the exact same action taken by two different people could have very different affects on their credit scores. What I can tell you though, is that there’s a risk your score could go down if you close the account. Here’s why.
One of the big components of your credit score is how much debt you are carrying compared to how much credit has been made available to you. This is called your utilization ratio and it generally accounts for about 30% of your overall score. The more credit you’re using relative to what’s available, the worse that component of your score will be. If you close an account and are then left with less open credit available, your utilization ratio will likely go up and your credit score could likely go down. As for how far down…again, it’s anyone’s guess.
Just Leave Home Without It
So, unless the card is costing you money I’d probably encourage you to keep it open and just remove it from your daily existence. Freeze it in a block of ice (I’m serious) or put it somewhere it’ll be difficult to get to. At the very least, stop carrying it around with you. Again, unless the card has some high annual fee, having the card isn’t the problem here. Using it is.
Spending Plan & Emergency Fund
Finally, if you really want to make good on your plan to stop using your credit card and get out of debt, you’ll need to put a spending plan in place (read budget) so that you don’t spend more money than you have coming in. As part of that plan, you’ll need to carve out some money that won’t be spent but that will instead be directed to building up a small emergency fund first (perhaps $1,000) and then to paying off your debt. Without a solid plan, it’s going to be hard to find the extra cash each month and without the extra cash each month, it’s going to be nearly impossible to get ahead.
Thanks so much for your question. I hope these ideas help and I wish you all the best!