Credit card debts are the main causes of poor credit score for many people in the UK. Credit card loans are always very tricky because they come with very high-interest rates that can make the amounts easily spiral out of control. When people check their credit reports and establish that the credit cards have very high debts, the first line of defense is closing them. However, this is not a good idea. Here are the main reasons why you should not close the credit cards.
Closing the credit card will result in losing good credit history
While closing a credit card might look appealing, it will not have any impact on the credit report. Just like a scar, the credit history will remain embedded in the report for a long time. Bad history will be visible on the credit card for up to 7 years while good history will last longer. Though the credit card has a debt at the moment, the good older history is very important in anchoring your credit score.
Financial experts explain that if you plug out the entire impact of the credit card, the personal credit score would plummet with a huge margin. It is, therefore, important to focus on alternatives such as consolidating the cards and adopting a prudent consumer behavior.
Closing the credit card lowers the utilization rate
Before closing a credit card, it is important to factor how it will affect the utilization rate. Utilization is factored as part of the amount owed. This factor is very critical, and most lenders use it to decide on whether to approve or decline a loan. By closing a credit card, an individual raises the utilization rate that consequently pulls down the credit score.
If a credit card has a very large credit limit and you continue charging the same amount, there is a risk of immediate negative impact on the score from closing the cards. Instead of closing the credit card, one can offset the utilization rate impact by requesting for a limited increase on other cards. It is also advisable to replace the old card with a new one that suits personal financial habits.
Terminating the credit card account will affect the mix of credit
The mix of credit is the last item on the list of factors that affect the personal credit score. About 10% of the credit score is dependent on the credit mix. By closing the credit card, you will have fewer open accounts that will ultimately pull down the credit score.
As opposed to closing the credit card, the better option is looking for a good debt clearance strategy and changing financial habits. Besides, it is prudent to understand how the credit score operates and change personal spending habits to stay within the credit card limits.
It is particularly important to look for expert advice if you find the credit card debts and their management getting out of hand. In many cases, the credit card companies are also willing to help their clients address any issue to live within their means.