How Shutting Off A Personal Line Of Credit Affects Your Credit Score
Shutting off a personal line of credit can negatively affect your credit score. We’ll explain why, but first let’s start with what a personal line of credit is. A personal line of credit is a loan with a defined limit that borrowers can pull funds from up to the limit when needed over a set amount of time. Borrowers use personal lines of credit for things like refinancing student loans or home improvements. So how does shutting off a personal line of credit affect your credit score? Why shouldn’t you close the personal line of credit once you’ve paid it off?
Shutting off a personal line of credit can negatively impact your credit score because it affects your credit utilization ratio. Shutting down a line of credit decreases the available amount of credit you have and can affect the length of your credit history. Credit Utilization makes up 30% of your score and is the 2nd most important factor. It is calculated as a percentage: the amount you owe divided by the total amount of credit you have available. Typically, you want to keep your credit utilization below 30% (less is better).
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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)
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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
Total available in 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.
If you’re looking to open a personal line of credit to increase your credit utilization score look no further! Launch Credit Union offers personal line of credit up to $20,000 and requires no collateral. CLICK HERE for more information.
