Why does closing an account hurt credit

If you applied for a loan or a new credit card around the same time you paid off your debt, you may have unintentionally caused a drop despite your lower overall debt.

While paying off your credit card debt is important, what matters more is on-time payments and your utilization rate. Many times, borrowers will ignore these factors, thinking that clearing up their debt as quickly as possible is the key to a stellar score.

But there are a few other methods to consider:. It can often take as long as one to two months for debt payment information to be reflected on your credit score. This has to do with both the timing of credit card and loan billing cycles and the monthly reporting process followed by lenders. However, the impact of the debt payment on your credit score may not necessarily be significant. Paying off an account in collections may or may not help your credit score.

The impact depends on a variety of factors, including the credit-scoring model being used. Older credit-scoring models will reflect that a collection account has been paid and now has zero balance, which can positively impact your score, says Madison Block of American Consumer Credit Counseling. Newer credit-scoring models, however, will ignore the zero-balance status on a collections account.

The total number of accounts you have in collections also factors into your credit score. However, if you have many debts in collections, then you may not see much improvement. Conversely, if the collection event is several years old, it may not actually be playing much of a role in your credit score anymore anyway. Paying off debt is rarely the wrong decision, especially high-interest consumer debt. This holds true even if it causes your credit score to temporarily go down. Your financial health is more important than your credit score, especially because there's no way to fully predict the results of each action you take.

Ultimately, if you continue to make timely payments on your outstanding debts and keep your spending in check, you should see your credit score start to rise again with time. But remember, accounts that have been open for a long time, and those with high credit limits but low balances, may have a positive impact on your credit score.

If you still decide to close some accounts to help your credit score, start by looking at inactive accounts that you no longer use.

When you close accounts, remember to keep at least one of your older credit accounts open. If controlling your spending is a problem, designate one card for regular use and try to pay the balance in-full each month to help your credit score. Keep the other cards in a safe place for emergencies only so that you are not tempted to overspend. Try not to close the oldest account on your credit reports.

This could shorten your active credit history and damage your score. When you close accounts, the correct way is to call or send a letter to the customer service department of the card issuer not the credit reporting company. You should receive an account closing confirmation letter in 10 days.

You shouldn't be tempted to cancel several accounts all at once when you close accounts. Gradually paying down and closing accounts may be the best plan if you are unsure about the impact on your credit score, or the amount of debt you need to carry.

If you want to cancel multiple credit accounts, space the closures over time to avoid this being viewed negatively by potential creditors. Avoid putting all your balances on one card as you close accounts to help your credit score. Be polite, but firm.

And, confirm with the operator that your account will indeed be closed. Then verify the account was actually closed through email and another call. The bottom line is that closing a credit card account could hurt your credit score. The key is balancing responsible credit management and the desire to maintain or improve your credit score. Understanding your specific credit situation, including your spending habits, utilization ratio and low risk cancellations can help you make the right decision.

Our student cards have great cash back rewards and benefits. User ID. Find a CKA. The average American has four credit cards. Some they may use rarely, or not at all. Closing those unused accounts is a good idea, but you have to do it right.