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Should I Close a Credit Card Account?

I get this question a lot and thought I would write about it.  It goes as follows:


I paid off this credit card.  Should I keep it open or close it?


Generally speaking, closing an account is a negative when it comes to your credit score. 


So, the short answer is yes, keep it open. Part of your credit score is influenced by the credit utilization rate. Here is how this works. Lets say you have the following credit limits and balances:


Credit card 1     5,000 credit limit  and 3,000 balance

Credit card 2     5,000 credit limit and 4,000 balance


Total, you have a $10,000 credit limit and you are utilizing a total of $7,000 of that credit limit. Your credit utilization ratio is 70%. Generally speaking, the lower the ratio the better it is for your credit score.


Let's say you pay off card 1 and close it. That closes down the credit limit of credit card 1.  Now you have credit card 2 with a 5000 credit limit and a 4,000 balance. Your credit utilization ratio went up to 80% because you removed credit card 1. Lets say you paid off credit card 1 and left it open.


Credit card 1     5,000 credit limit  and no balance

Credit card 2     5,000 credit limit and 4,000 balance


Your credit utilization ratio is now 40%. The lower the better. In fact as it goes over 30% the utilization ratio becomes a negative on your score.


One last tip - lets say you pay off the balance of credit card 1 and now you are going to leave it in a drawer never to use it again. Go online and sign up for the text or email alert system. This alert will let you know if you have a balance due. In other words, if someone else fraudulently used your card, you need to know. If you had a balance and didn't know it, you probably wouldn't be paying attention. The next thing you know you are in collections!


Remember the goal is to keep that utilization rate down below 30% for the best effect on your credit score.