Your credit score is an odd balancing act – we’re often warned not to take on too much debt because that could hurt our credit score. But ironically, you could also harm your score when lowering your debt by closing an account. Fortunately, the drop in your credit score in this case is much smaller than the damage that a missed payment would cause, but it’s still a possibility you need to be aware of. Here’s why it happens.

Credit record

No-one can argue against your creditworthiness if you have a long history of meeting all your debt repayments. If you have long-standing accounts that credit agencies can reference when doing a credit check, they have evidence of that responsible behaviour going back a long time.

The first thing agencies look for is a clean record of meeting all your past payments, followed closely by how long you’ve had a clean credit record. So, when you close an account – even an old store account you never use anymore – you’re removing a piece of evidence and reassurance that credit agencies could be adding to their assessment. They will have only your remaining accounts to reference.

Credit risk

Missed or late payments are red flags to credit agencies and lenders, so do your utmost to avoid them – there are better solutions if you’re struggling to make a payment. A missed or late payment immediately raises questions about how much risk a lender is taking on you. The more of your credit history that a credit agency can examine, the more evidence they can consider to set your credit score at a level that truly reflects your credit risk.

Keeping an eye on your credit use is an area where you can influence your credit score

If they now have less information to work with because you’ve closed an account, then they might not see an accurate picture of your long, consistent payments before you had any lapses. And if they don’t have that information to do their assessment, they might consider you a higher risk and lower your credit score as a result.

Credit utilisation

Closing an account can also hurt your credit score by pushing up your total credit use – so this is an area in which it pays to do the maths. Credit use is a measure of how much of your available debt you’re using. It’s based on the reasoning that the closer you are to your limit on all your accounts, the greater the potential risk is that you could fall behind on payments.

Say, for example, you have 4 different store and credit cards, each with a credit limit of R10,000. If you’re using 50% of the available credit on 3 (R15,000 in total), and none of the credit on the fourth card, your credit use would be 37.5%. That’s not outrageously high, but you should probably keep this number closer to 30% to maintain a good credit rating. But if you were to close your fourth card because you’re not using it, you’d push your credit use to 50%, which would impact your credit score negatively.

You can expect less of an impact if you’ve kept all your cards fully paid up and you simply want to reduce the number of credit or store cards you have – something to consider if you’re paying monthly fees on accounts that you no longer use. Even in the example above, for instance, if you reined in your spending and managed to reduce the balance on 3 cards to R3,000 each, you could close the unused account and still keep your credit utilisation at 30%.

Many factors that determine financial realities, like credit scores, are frustratingly beyond our control. But keeping an eye on your credit use is an area where you can influence your credit score by understanding the process.