image credit: Andres Rueda
How to Improve Your Credit Score and Keep Your Credit Cards Open
Once you have your Visa card paid off, you should just close out the credit card account and that will improve your credit score, 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 you’ve paid it off. In fact, getting rid of that nasty old credit card account will probably improve your 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.
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 credit card account, you would lose all of that available credit. Available credit – that is not being used – will improve your credit score.
So, paying down your balances to $0 is how to improve your credit score, while closing your account could actually hurt.
Have you ever closed out a credit card account? What happened to your credit score?
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