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Topics addressed on August 5, 2009:
The effect on credit scores of paying off and closing credit cards
Will paying off and closing a credit card hurt my credit score?
Paying off a credit card balance is always positive, but closing the account could have a negative impact on your credit scores, at least for a short time.
Credit scoring systems not only look at individual credit card balances, they also consider something called your utilization rate. Your utilization rate is the total of the balances on all of your credit cards compared to the total of the credit limits on all of your credit cards.
For example, if you have two credit cards, each with a $5,000 limit, you have a total credit limit of $10,000. If you have a $4,000 balance on one card, your utilization rate is 40 percent.
If you close one of those cards, your total limit drops to $5,000 and your utilization rises to 80 percent. That can have a negative impact on your credit scores.
If you are charged close to your maximums, you are very likely spending more than you make and using credit to supplement your income. Keeping your credit card balances low shows that you make good decisions about when to use them and how you repay them.
So, whether or not paying off a credit card will hurt your scores really depends on the other accounts you have in your history. If you have plenty of good, active accounts with low utilization, closing one account will likely have minimal impact.
Thanks for asking.
- The "Ask Experian" team