Paying off a credit card balance takes hard work, dedication, and sometimes a few shed tears or longing looks at a store window you force yourself to walk past. Getting caught in the spiral of interest and fees is easier than climbing out, so when the statement comes in the mail (email?) with a beautiful “0” glowing off the page (screen?) after shouting with joy the first thing most people want to do is close the darn thing so they never have to look at another statement from XYZ Bank again.
After all your hard work paying off the balance, the last thing you want is to knock down your credit score.
(My imaginary reader’s reaction): WHAT?? What do you mean knock down my credit score? If I’m not overdue on any bills or over my limit why would my credit score drop?
Welcome to the world of the credit score- a murky, confusing, upside down place where sometimes the best action for your personal finances is not the best action for your credit score.
Part of your credit score is your “available credit.” This means: how much you’ve spent compared with how much credit you have available in total (your credit limit). When you close a credit card this lowers your available credit because that credit line is no longer available for your use. Available credit is 35% of your credit score.
Example: You have 2 credit cards. Card #1 has a $2000 limit. Card #2 has a $3000 limit. Your total available credit = $5000. If you close Card #2 then your credit limit becomes $5000- $3000= $2000. That’s more than 1/2 your credit limit lowered!
This becomes a problem especially if you still have balances on the other card because your balance is closer to the limit after closing a credit card without even charging more. Or, even if you don’t have a balance now, when you use your credit card the amount spent will reach the credit limit faster, which means your credit score becomes in danger more easily.
My advice: The ideal number of credit cards to have open is 2-4. If you have within this range, consider not closing a card, even if its balance is 0. (Even better, really). If you have more than this number, work on paying down the balances on a few cards before closing any.
IMPORTANT EXCEPTION!!!! If you think that by having the card open you will start spending on it again, even if your budget tells you not to spend on the credit card, then CLOSE IT. Keeping open credit that will hurt you again is not worth it. Every decision comes down to your personal situation. Do not base all your financial decisions just on the credit score. It’s a balance 🙂