Closing a credit account such as a credit card, line of credit or loan may seem like the answer to cleaning up your credit report, but taking this step may not be the best for your credit score. Before you start to clean house, use these tips to see how closing your account can impact your financial health:

Know your ratio

Part of what makes up your credit score is your “credit utilization ratio” – how much credit you have available (your credit limit) vs. how much credit you are using (your current balance). This means that having a zero balance on an open credit card can boost your credit score. Closing that same account reduces your available credit, which increases your credit utilization ratio and can lower your credit score.

Balance the benefits and considerations

You may consider closing credit accounts that have raised your interest rate or introduced new fees. If you struggle with using credit responsibly and feel that having access to credit is going to result in more debt, then closing an account may be best.

Manage the logistics

If you decide to cancel a credit card or line of credit, take steps to minimize the impact on your financial life. Remember to switch automatic deductions, such as gym memberships, DVD rental services, mobile phone bills, and additional recurring expenses, to other payment methods before cancelling to make sure payments continue to be paid properly and on time. Closing the account will be easier by avoiding new charges because it will be easier to verify your account balance and request the account be closed.

Your lender or creditor typically will send a letter confirming the closure of the account; if a letter is not received, you might want to follow-up and request a formal letter for your records. After a period of 30 days, you could request a copy of your credit report to confirm that your account was closed and reported accurately.

By going through these steps to understand the impact and manage the logistics, you can make a better informed decision about whether closing the account is right for you.

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