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What’s Better For Your Credit Score?

What’s Better For Your Credit Score?

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You’ve worked very diligently to pay off your credit card or cards; Now what?

A very common question is whether to close the account or keep it open. Which is better for your credit score?

From a credit standpoint, closing the card can impact your credit rating in a negative way. You’ve been building credit for years which determines the age of your credit history. This is one variable involved in calculating your credit score. Another variable is available credit. If you have an account that has $1000 available credit and the balance is zero, your credit utilization is in better standing.

So what is credit utilization? Part of your credit score is calculated by the amount of credit that is available vs. the amount you have used. If your balance is over 30% of the available credit, it can cause your score to lower. Example: if you have an available credit limit of $1000 and your usual monthly balance is under $300, this is  low credit utilization and this has a positive effect on your score. If your balance is at $700, your utilization is too high and has a negative impact on your score.

Credit is a tricky thing to master.

Now back to the question at hand. Cut it or close it?Excellent Credit Score

Common misconception: Pay it off and close it.  You’ve worked hard to pay it off, why not close it? If you are under the assumption that you will get points added to your score for paying it off and closing it, you are mistaken. Closing a paid card can hurt your credit score. You are no longer reaping the benefits of the age of your credit card, your payment history on the account, and the low utilization.

You should leave the credit card open if:

  • It’s the only credit card with available credit
  • It’s your only credit card, period
  • It’s your oldest credit card
  • The terms are better than those of your other cards
  • Closing the card will raise your utilization to more than 30%

If you think that the card being open may be too tempting to you, cut it up. If you are serious about not using it anymore after working so hard to pay it off, cutting it up can be not only a celebration of your hard work, but also reduces the temptation to use it again.

“Our freedom can be measured by the number of things we can walk away from” ~ Vernon Howard

Author: Kat Hollerbach/ Debt Relief Counselor @ DebtTech Financial Solutions

You can follow your credit score and learn what steps you can take to improve or maintain your credit score at https://www.creditkarma.com.

*Note: Be aware of annual fees on a card you have paid off. If you have an annual fee that is charged each year, make sure you pay attention to any bills that come and don’t forget to pay this to avoid late fees and a late payment history. You can always check your contract to find out whether you have a fee added with or without a balance on each card. 

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