How Shutting off a Personal Line of Credit Affects Your Credit Score
Updated: October 2, 2024
Closing a personal line of credit can have a detrimental impact on your credit score, and we’ll explain why shortly. But first, let’s clarify what a personal line of credit is. Essentially, it’s a flexible loan with a predetermined limit that allows borrowers to withdraw funds up to that limit over a specified period as needed. Many people utilize personal lines of credit for purposes like refinancing student loans or funding home improvements.
Now, you might be wondering how shutting down a personal line of credit can influence your credit score. Why is it advisable to keep it open even after you’ve paid it off? Let’s dive into those important points.
The Affects to Your Credit Score
What Your Credit Score Looks Like With A Credit Card & Personal Line Of Credit Open:
Credit Card #1 Available Credit $10,000 with a balance of $5,000
Credit Card #2 Available Credit $10,000 with a balance of $5,000
Line of Credit: Available Credit $30,000 with a balance of 0
Total in available credit is $50,000 with balances of $10,000 (a/k/a utilization). Take 10,000 (the total that you owe) and divide that by your “available credit” of $50,000. This calculation shows that you have used 20% of your available credit. Which is a good ratio; You are in the range you want to be in for revolving debt. (Remember 30% or less is the magic number).
What Happens To Your Credit Score When You Close Your Personal Line Of Credit:
Credit Card #1 Available Credit $10,000 with a balance of $5,000
Credit Card #2 Available Credit $10,000 with a balance of $5,000
The total available credit is now $20,000 with balances of $10,000. You are now at 50% of your capacity and your credit score just decreased because you closed your credit line and lowered your capacity.
You have just lowered your credit score by 50 points in this example because you closed your line of credit.
Rule of thumb: For every 1% capacity= 1 point on your FICO score.
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