When to close your credit card
Paying off a credit card is an accomplishment worth celebrating. And many consumers take great pride in cutting up their card or closing their account once a credit card’s balance hits zero.
Even though closing a credit card might feel like the bonus cherry on top of a credit score-boosting sundae, you might want to hold off shutting down that account.
That’s because, depending on the scenario, closing down a credit card with a zero balance could have an unwelcome and counter-intuitive effect on your credit score. It could lead to your score dipping -- not surging upward.
Before determining if you should close the card, you need to understand credit utilization, the amount of purchasing power you have at your disposal. The optimum scenario to boost your score is to have a credit utilization of lower than 30%.
To calculate your credit utilization, add all of your credit limits and then add up your total debt. Then divide debt by credit available.
Example: Total available credit = $1000, total debt = $500, credit utilization = 50%
Using the above example, closing a card that has a $300 credit limit would raise your credit utilization ratio to more than 71% because you’ve reduced your total available credit limit.
So before you rush to break up with a credit card you’ve paid off, crunch some numbers.
If closing the card could kick your credit utilization ration above 30% keep the card open. In fact, if keeping the card open means your credit utilization will drop to around 20%, even better!
It’s impossible to calculate exactly how many points closing a credit card might cost your credit score (payment history and types of credit are among the other factors) but just remember, it can take months to regain those lost points.
So if you’re in the market for a mortgage or new car loan, hold off on closing any cards that you’ve paid off to have the highest score possible.
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