Once I have my credit card paid off, I should just close out the account, right? This is an interesting question, and one that causes a lot of confusion for consumers.
It just makes logical, intuitive sense to close an account after I’ve paid it off. In fact, getting rid of that nasty old debt account will probably improve my credit score….
Debt is bad. Pay off debt. Close account. Debt is gone. Cool!
Not so fast! It may surprise you to know that closing that credit card account, that you spent months or years paying off, will probably ding your credit score.
I can hear you scratching your head right now.
Here’s how it works.
One of the factors that influences your credit score is the proportion of your credit line used. For more on the factors that influence your credit score, see my previous post here.
When you open a line of credit (i.e. credit card) you now have that line (whatever the amount) available to you. As you use it up, by making purchases, you increase the proportion of the line used and decrease the amount of credit available to you (bad).
100% of your available credit used = Maxed Out (very bad)
When you begin to pay down your credit card debt, your balance decreases, and your available credit increases (good).
When your balance reaches $0, you have the maximum amount of available credit possible (super).
If you then closed the account, you would lose all of that available credit. Available credit – that is not being used – will help your credit score.
So, paying down your balances to $0 will help your score, while closing your account could actually hurt.
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