What is Credit Utilization Ratio?
When a credit card is issued, a limit is set on it a part of which could be used to buy something. This usage contributes to credit utilization. The credit utilization ratio is the total amount used of the all the revolving credit to the total available credit. Suppose you have a credit card of $3000 and you have used $1500 out of it, additionally you have used $2000 of your total line of credit of $4000, here the credit utilization ratio would be 50%. It is one of the factors that is used to calculate the credit score. If you could keep this number below 30% then your financial heath could be rea;;y strong.
Does Closing a Credit Card Hurt Your Credit Score?
It cold be best understood with an example. Suppose you have two credit cards both of them having limit of $3000 each and you have used $2200 across both of them which leads to credit utilization of 30%. If you cancel one of them but the credit utilization is same, then the total ratio would be double which would definitely impact your credit score.
What If I cancel the Credit Card When I cannot Control My Spending?
It is true that closing a credit card can affect your credit score while not closing it when spending is out of control could be more troublesome. Nowadays, specially post covid, overspending is very common. So, it is advisable to close the credit card instead of getting stressed about repayment and overspending. However, keep it as a last solution and try to implement alternative ways to save this financial tool for your overall financial health.
Sometimes, you notice the expenses on your statement which you have not done and you feel like victim of identity theft. In that case you can reach out to your credit card provider and request the cancellation right away of the existing card and can request a new card. Cell phones purchases are very common by fake identity checks so to track such fraudulent activities, keep a regular check on your credit report. You are entitled to receive one free report per year from any of the major bureaus Equifax, Experian, TransUnion and if you notice anything wrong inform them immediately. The part the credit card play in your payment history is one of the most significant methods. Your credit card payments are normally recorded to a credit bureau when you make them. The same holds true if payments are late. Your credit score may be impacted if you consistently make these payments on time or if you start missing payments.
Generally speaking, the longer your track record of responsible credit use, the better. Therefore, cancelling a credit card that also happens to be your initial credit account could have an effect on your score because it could change the average age of all of your accounts. However, as already mentioned, closed accounts continue to appear on your report even after they are closed.