Posted on: May. 30, 2017 in Uncategorized

When it comes to credit scores, there’s plenty of advice out there about what you should and shouldn’t do. One popular piece of advice is not to close your credit card accounts when your card is paid off. This one is true most of the time. But do you even know why? Understanding how your credit score is derived can help you understand why closing accounts can hurt your score.

  1. Debt-to-credit ratio. Part of your score is made up by looking at how much credit is available to you (your credit limit) and how much you’re using (your current debt). Let’s say you have three cards, all with a limit of $10,000 – that’s a total of $30,000. One has $9,000 charged to it, another has $6,000, and the third has zero. This would mean you’re using 50% of your available credit. But if you close the one with no balance, you now only have a $20,000 credit limit and you owe $15,000. Just like that, you’re now using 75% of your available credit. You want to use no more than 30%, so keeping a paid-off card open will help you get and stay below that 30%.
  2. Credit history. The length of your credit history is important. If this credit account is your oldest one and you close it, suddenly your history is shorter. Also, your payment history matters, so having a record of paying timely can only help you.
  3. Credit mix. About 10% of your credit score is based on the type of credit you have. You need a good mix of revolving credit, like credit cards, and installment credit, like an auto loan. Closing an account can throw a good ratio off, resulting in a lower score.

Keep in mind that closing accounts won’t ever help your score. The best that can happen is you’ll avoid using the card and racking up more debt. If that’s your goal, you’re better off securing the card away somewhere so you can’t easily use it rather than closing the account.

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