One of the most frequent questions a person asks after viewing their credit report is “How can I improve my credit score?” This is a great question that everyone should ask however many people usually ask the wrong person and get the wrong advice. You might have asked this question to your friends or family and they
probably told you "close your credit cards and your credit score will improve”. This advice should not be followed! This advice can drastically hurt your credit score and can potentially cost you a lot of money.
Now to understand why this can affect your credit score negatively we first need to explain some of the factors that are calculated in to your credit score. Here are just two examples of how your credit score can decrease dramatically only by closing a credit card:
The average age of your open accounts – Lets say you have 2 credit cards and one has been open for 5 years and the other has been open for 1 year. The average age of these credit accounts is 3 years (5+1 / 2).
CAUSE: If you decided to close your credit card that has been open for 5 years you just drastically decreased the average age of your open accounts and this can severely decrease your credit score.
EFFECT: Now your credit report reflects someone who is newer to credit ad does not have as much experience with unsecured debt. When you have current open accounts on your credit report that have been open for a long time this shows lenders you know how to manage your debt responsibly over time and are considered less of a risk.
Percent of available credit – Lets say in this example you have 2 credit cards and they each have a credit limit of $1000. One of your credit cards is completely paid off and the other has a balance of $900. Your percent of available credit is currently 55% ($1100 / $2000).
CAUSE: Now if you closed your credit card that was completely paid off your percent of available credit will decrease drastically to 10% ($100 / $1000).
EFFECT: Now your credit report will reflect someone who has greatly over extended themselves and someone who does not manage debt wisely. It is best to not use more than 25% of your available credit. If you use more than 25% you may notice your credit score decrease.
Please do yourself a favor and do not follow friend or family’s credit advice unless they are a credit counselor. Every persons financial or credit situation is different. So many factors are calculated into your credit score and you may want to consider sitting down with a professional to discuss your credit report if you are going to make any potentially life changing decisions. Remember there is no quick fix to improve your credit score. Good luck!