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The most common credit mistake that people are aware of is not paying their bills on time. The less obvious mistakes however are the ones people tend to make when they are trying to improve on their credit scores and become more financially responsible. And the biggest mistake among these less obvious ones? Closing credit card accounts. This may sound ironic, especially if you just finished paying of your balances and have been relieved of your debt. However, aside from not paying bills on time, closing credit accounts could be the biggest mistake you could ever commit that might drastically ruin your financial health.

When you have closed down an account, the negative effects would not be evident until further down the road, long after you have forgotten about it. If that account contained more transactions of what a good credit should be, the good news is that it will stay on your report longer than bad credit will. Bankruptcy and delinquencies will stay on your report from seven to 10 years; on the other hand, transactions or accounts with zero delinquencies will stay on your report for a full 10 years even after they have been closed. This will be good news to your credit score during that period of time. However, after 10 years, the account will be removed from your report, which means that all positive history associated with it will be removed as well. This will cause your credit score to drop, especially if your overall length of credit history is drastically shortened.

The major credit bureaus compute credit scores based on different criteria including length of credit history and credit utilization ratio. Between the two, credit utilization ratio has more weight. It will affect your credit score greatly especially if you close down some of your accounts. For example, you have three credit cards which entitle you to a $15000 credit limit and you have a total balance of $2000. Your credit utilization ratio amounts to 13.3 percent. This percentage will not negatively affect your score. Now, because of your effort to avoid overspending and protect yourself, you decide to close down two of your credit cards. This might seem to be a good idea, but, you have to realize that your credit limit will now be brought down to $5000 and because you have a running balance of $2000, your credit utilization ratio will shoot up to 40 percent. This figure will hurt your score which in turn will make it hard for you to open new credit for the purpose of improving your score.

Now, closing a credit card account is not always a bad idea. If you happen to be offered a card with better rates, perks, as well as equal or higher credit limit than the one you wish to close, then the higher limit will be able to compensate for the decrease in your credit history. You just have to check your credit score and report before you decide so, you can evaluate the limits and the credit history of your cards and decide on the best option.

Moreover, despite the negative impact of closing your credit card accounts to your credit score, you should never postpone cancelling them in the unfortunate event of identity theft. If your cards have been used fraudulently, it is better to take the risk of damaging your credit score yourself, instead of the fraud completely ruining your financial health due to unauthorized purchases which usually end up with maxed out credit limits that result to insufficient and late payments. If you find the need to close one of your accounts, listed below are the tips on how you could minimize the damage to your credit score.

1. Close the right card- Do not close the card you have the longest credit history with, with the highest credit limit and the one with the lowest interest rate and processing fees.

2. Pick the correct timing- When you decide to close an account, make sure that you do not plan on applying for loans, mortgages or new credit any time soon.

3. Manage your credit utilization ratio- When closing an account, make sure that you compute your current utilization ratio, so that you can pick the card which only has a minimal effect to your ratio. You might also want to pay off your balances completely before you cancel an account to make sure that your ratio does not increase and make your credit score drop.

You should remember that credit is not a liability. It is considered an asset and the higher credit you have, the better chances you have at achieving your goals which might include owning a home, buying a car and attaining financial security. Closing down accounts might sound to be a good idea especially if you are trying to protect yourself from debt; however, although it might protect you from debt, it will hinder you from being able to apply for loans and mortgages in the future because of its effect on your credit score. So instead of closing them, just lock them away in a box or cut the cards. In this way, you will not be able to use them but they will not damage your credit score either.