Many people think to improve their credit score, they just have to pay off some debts and close their accounts.
This is not exactly accurate.
There are several reasons to think carefully before closing your accounts.
First, if you close an account you need (for example, if you close all your credit card accounts)
then you will have to reapply for credit, and the inquiries from lenders will cause your
credit score to drop.
Secondly, most credit bureaus give high favorable points to those who have good long-term
credit history.
This means closing the credit card account you have had since college may actually hurt you in the long run.
If you have credit accounts you don’t use or if you have too many credit lines, then by all means pay off some and close them.
Doing so may help your credit score – but only if you don’t close long-term accounts you need.
In general, close the most recent accounts first and only when you are sure you will not need that credit in the near future.
Closing your accounts is a bad idea if:
1) You will be applying for a loan soon. The closing of your accounts will make your credit
score drop in the short term and will may not allow you to qualify for good loan rates.
2) Closing your accounts will make your overall debt balance too high. If you owe $10 000 now
and closing some accounts would leave you with only $1000 of possible credit, you are close to
maxing out your credit – which gives you a bad credit rating.
In the short term, closing accounts will lower your credit score, but in the long run it can be
beneficial.
