I have four accounts that have a limit of $300 each. I have had these accounts for years. I would like to know if I should close them once I pay them off. I am concerned that having credit cards with low credit limits is negatively affecting me.
From a credit scoring standpoint, it is typically better to keep the paid off accounts open. Your credit limits might have a small impact on your credit scores, but your overall utilization rate is much more important. Once your accounts are paid off, your utilization rate will be very low, if not zero.
What Is Utilization Rate?
Your utilization rate is also referred to as your balance-to-limit ratio, or utilization ratio.
To calculate your utilization rate, you simply add up all your credit card balances and divide that number by the total of all your credit limits and divide.
When you close an account, you lose some of your available credit, which will make any balances a greater percentage of your total available credit and therefore increase your utilization rate. An increase in the utilization rate is a sign of risk and hurts credit scores.
Keeping Balances Low Helps Credit Scores
Rather than close the accounts, make small charges occasionally and pay the balance on time and in full in each month. Generally, lenders will increase your credit limit over time as you demonstrate that you can manage the account responsibly.
Time and patience are the real keys to building a strong credit history that will be reflected in good credit scores.
Thanks for asking.
Jennifer White, Consumer Education Specialist