If you pay off a credit card and close the account, how is your credit rating affected?
Fair Isaac Corporation or the FICO way of calculating your credit score takes into account 5 factors that will affect your score. First of this is your payment history, which is about 35% of your total credit score. Second is your outstanding debt, this is 30% of your total credit score.
Third is the length of time that you have credit, covering 15% of the total. Fourth is based on new credits, comprising 10% of the overall score. And last but not the least is the kind of credits you presently have, taking the remaining part of your credit score, which is equivalent to 10%.
Based on the composition of the overall credit score above, it would show that in the short term you would be able to increase your credit score, since you paid your credit card balance on time, however by closing your account, this will also have an overall impact on your credit score in the long term because the FICO credit score also consider the term of your debt, which can be gleaned above. In this case, your credit score will eventually decrease. "Because more information about your past payment history gives a more accurate prediction of your future actions.
There are a number of factors that will determine if closing the account helps or hurts your score. A number of ratios are considered in the equation and depending on the cards limit and age your score might go up or down.
Closing a credit card account can actually hurt your credit score. The reason is because one factor that goes into a FICO score is the amount of available credit you have. Generally speaking, the more available credit you have the better your score.
If you cancel your card you are reducing the amount of available credit which ultimately could lower your score. Also, if your in the market for another credit card that offers better perks then depending on your credit it could make it harder for you to get approved for the better card. Especially now a days with the credit card industry not so freely lending money like it use to.
Now with that being said if you have good credit, closing an account will only will only affect you by a few points, so if you have good credit it won't be a big deal. However, if you have less than good credit a few points it could be the difference in getting approved or not. Here's an article that will give you more information.
Hope this helps and good luck! creditcardoffersiq.com/credit-card-tips/....
You may have heard that closing accounts shortens your length of credit history, which is worth 15 percent in the FICO score model. Other scoring models exist, but I'll use FICO as the example since it's the industry standard. The reality: Closing an account doesn't automatically forfeit years of good payment history.
Accounts in good standing can stay on your credit report for up to 10 years, and those with delinquencies will remain for up to seven years. In other words, the closed account probably won't disappear for some time. Behind payment history, how much you owe comprises the second most important factor in the calculation of FICO scores.
This category of data includes overall utilization, which is the sum of your balances divided by the sum of your credit limits. Closing accounts can increase your utilization and lower your score. The FICO score doesn't factor the balance and limit of a closed account into utilization once the cardholder has paid off the account.
A lowered credit limit by itself won't take away points because credit limits are not a standalone factor for FICO scores. If you keep low balances on your other accounts (that doesn't mean you actually have to carry a balance), the impact of closing one card out should be minimal. If you have two credit cards, one with a zero balance and $1,000 limit, and another card with $200 charged to it and a $1,000 limit, and you close the one with no debt, your overall utilization would go from 10 percent to 20 percent.
If however, you had $800 on the second card, your aggregate utilization would shoot from 40 percent to 80 percent. It's impossible to say exactly how much a score will drop from increased utilization (since the actual algorithm is proprietary), but the higher this ratio climbs, the greater the damage to your score. If you have high balances on other cards when you close an account, your utilization could climb and ding your score.
As soon as you start to pay down those other balances though, your score should improve. Past high balances won't penalize the score for years to come, as delinquencies and other credit missteps do. Credit scoring models use the most recent balance and limit reported by the lender.
Pay down other balances to protect your score if you decide to close an account due to an annual fee. If you pay in full every month, this advice translates to charging less on your other cards. Issuers may still report a monthly balance even if you pay the entire bill each time.
Use our free FICO score estimator to see where you stand.
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