I Paid It Off - Should I Close My Credit Card?

If you are trying to pay off your credit cards then naturally you may think closing as many accounts as possible will only help your credit. Well, you would be wrong about that! Even if they are empty keep your credit cards open if they don’t have any annual fees attached.

Why Keep Them Open?

Your credit score is made up of many factors: debt diversity, on-time payments, available balance, number of accounts, borrowing limits, oldest line of credit and so on. If you are looking to increase your score taking sudden drastic action toward one of those factors can do an unexpected amount of damage to another.

Credit Line Age

A big factor in your score is how long your oldest line of credit has been open. The older the credit line the better it looks for your credit. Though you may be able to consolidate balances and pay off cards you shouldn't close them because that could remove a long-standing account from your report which can actually lower your score.

Credit Utilization Ratio

A huge part of your score is determined by the ratio of how much you owe to how much credit you have available. If you owe $5,000 and have a total credit limit of $75,000 you are in great shape. But if you close unused accounts you are also getting rid of some of that available credit. So that $75,000 drops to $25,000 and increases your debt/borrowing ratio, lowering your score. You still owe the same amount of money but the percentage in relation to your available credit increases drastically. That percentage is crucial!

What You Should Do

What to do instead of closing accounts is pay them off! Getting rid of debt is the fastest way to a higher score. If you want to consolidate consider transferring balances to one credit card (preferably the one with the lowest interest rate) and tackling it all together. Leave those other accounts open and balance-free (if there are no fees) and cut up the cards.