Will my credit score improve if I stop using credit card?

Will Closing Credit Cards Actually Hurt My Credit Score? The Surprising Truth

Many people believe that the best way to improve their credit score is to simply stop using their credit cards. The logic seems sound: less debt means a better credit report, right? While reducing debt is certainly a positive step, closing credit cards, especially older ones, can actually have the opposite effect on your credit score, potentially harming it more than you realize.

The key lies in understanding how credit scoring models work. Services like FICO®, the most widely used credit scoring system, don’t simply look at your outstanding debt. They analyze a variety of factors, and one crucial element is your credit history. This includes the length of your credit history and the mix of credit accounts you hold.

Closing a credit card, particularly one you’ve had for several years, significantly impacts your credit history in two ways:

• Reduced Average Account Age: Your average account age is a significant factor (around 15% of your FICO® Score) in determining your creditworthiness. Closing an older account immediately shortens this average, suggesting less experience managing credit. This reduction, even if your overall debt decreases, can negatively impact your score. Think of it like this: a long, positive history of responsible credit use is a valuable asset. Closing an old account is like throwing away a piece of that valuable history.

• Decreased Credit Utilization Ratio (But Maybe Not): While closing a card might seem like it lowers your credit utilization ratio (the percentage of your available credit you’re using), this benefit is often outweighed by the negative impact on your credit history length. Furthermore, if you’re already keeping your credit utilization low (ideally below 30%), closing a card might not offer much improvement in this area. In fact, closing a card could even increase your utilization ratio on remaining cards if you maintain the same spending habits.

So, what should you do?

Instead of closing credit cards, consider these strategies to improve your credit score:

• Pay your balances in full and on time: This is the single most important factor affecting your credit score. Consistent on-time payments demonstrate responsible credit management.
• Keep your credit utilization low: Aim to keep your credit utilization below 30% on each card, and ideally below 10% overall.
• Maintain a mix of credit accounts: Having a variety of credit accounts (credit cards, installment loans, etc.) can demonstrate your ability to manage different types of credit. However, don’t open new accounts just for the sake of diversity.

In conclusion, while managing your debt is crucial for good credit, closing credit cards, especially older ones, is often counterproductive. Focus on responsible credit card use, timely payments, and keeping your utilization low. If you’re struggling with high balances, consider seeking professional financial advice before taking drastic steps like closing accounts that could ultimately harm your credit score.