WAIT! DON'T CLOSE THAT CREDIT CARD ACCOUNT JUST YET! |
By Stewart Pelto on March 12, 2010
.jpg.aspx?width=75&height=75) At long last, you say, I paid that stupid card off! I’m going to snip it up into tiny bits, stomp them into a mush, and dash it all into a pit! Hang on and listen to this: if you bash your credit cards, you might be bashing your credit score too.
Your credit score is calculated in a number of ways. One method divides your current debt by your total available credit. The resulting number is somewhere between 0 and 1, with 1 being unfortunate. So if you have $5,000 in debt and $20,000 in available credit, your number is ¼, or 25%. This looks great – you have a modest amount of debt, but aren’t overextended. Except you just canceled that $10,000 account. Now you only have $10,000 in available credit with the same $5,000 in debt. Your new number is ½, or 50%. 50% does not look as good as 25% when attempting to qualify for a car or home loan. You just did yourself a private favor and a public disservice at the same time.
So what should you do? If you want to avoid the temptation of spending again, feel free to destroy your physical card. That won’t close the account and it will probably make you feel great. But keep the account itself open, even if it’s unused. Your lenders like to see a good credit history – so don’t go about erasing huge chunks of it after you’ve just been through the trouble of cleaning it all up, ESPECIALLY if it is your oldest account. If you must close it, wait until after you’ve qualified for that car or home loan.
One last word of advice: if you’ve got your balance paid in full and the company tries to charge you annual fees, call them up and threaten to close the account. They’re likely to back down from their efforts. But if they don’t, make good on your threat and close it – annual fees are just plain not worth it. If they go unpaid, they can turn into late fees and damage your credit score.
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