Don’t close your credit accounts!

I recently had someone tell me they were going to pay off a credit card and close the account. I told them not to, and here’s why…

Let’s say you have 5 credit cards and each of them has a credit limit of $2,000. Let’s then say that your balances are $500 on each card. The totals would be as follows: You would owe $2,500 (5 cards @ $500). The total amount you can owe on these cards is $10,000 (5 cards at $2,000 each). You have borrowed $2,500 of your available $10,000 – therefore you owe 25% of your limit.

If you paid off one of your credit cards ($500), then you would owe $2,000 of the $10,000 available and now you only owe 20% of your limit. Lowering your percentage this way helps to increase your credit score. The smaller the percentage you owe, the more “credit responsibility” you demonstrate.

If you took that paid off credit card and closed it, you would then increase the percentage of what you owe… You would still only owe $2,000, but your total available credit would only be $8,000. This would raise you back to owing 25% of your limit. When your percentage goes up, your credit score goes down.

So, as you pay off your debts, you should not close your accounts. (If you pay an annual fee or a non-activity fee, closing the account MAY be an option here – depending what your immediate & future goals are).

Keeping your credit score up is a game. You should know the rules to have a chance at winning! I figured if my friend didn’t understand this, you may not either. So here’s your free advice for the day!