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What happens to your credit scores when you close your credit card with zero balance

By Brian Anderson
Published: Wednesday, June 15th, 2011

What happens to your credit scores when you close your credit card with zero balanceMost of us would have struggled with bad debts on our credit cards at some point in our lives and when we finally manage to clear the balances on our card, it is only natural to feel relieved and may sometimes think of bidding to our cards goodbye. But think again before you decide to close the card after it has been paid off. There are two things in the credit rating system that could come back to haunt you at a later stage.

There is a certain formula that is used in the FICO scoring system and although FICO doesn’t reveal all the components that go into that secret formula, there are some guidelines that they follow.

The FICO credit scores are based on a number of factors and the amount of credit card debt that you have charged is taken into account and at least 30% of your FICO score is based on that. So, the lower the amount of debt you carry, the better it is for the credit scores as your credit utilization ratio would be much lower. For example, if you have only one credit card and you have a $5,000 credit limit on it, but you have $4,000 balance on your card. Then you’re the credit utilization rate would be 80% as you would have charged 80% of your credit line. This is not a good thing at all. You must ideally try to keep the credit utilization rate somewhere around 25% most of the time.

So, when you close your account, you will simply be chucking your credit utilization rate and that will invariably lower your credit score. For instance, we will assume that you have two credit cards and each has a $5,000 limit on it and you have charged about $1,000 on each of the two cards. Hence your whole credit utilization rate would be 20% which is $2,000 divided by $10,000.

But now you decide to use the 0% balance transfer offers instead. You do the balance transfer of the whole amount of $1,000 from one card to another which offers you the 0% deal and then close the card which has no balance. Then the whole scenario just changes and this is not for the better. Now there is just one card with a $5,000 limit, and the current total balance is $2,000. Hence the credit utilization ratio will jump from 20% to 40% and you will appear far more risky due to this.

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