Many people ask us questions about why their credit reports aren’t as good as they think they should be. Frankly, in many cases it’s because of irresponsible financial choices like failing to pay bills on time. Indeed, if you’re looking to wreck your credit score there is no faster way than to fall behind on some of your bills, paying them late several times or stop paying them altogether. (OK, everybody now collectively has to say ‘duh’.)
Some credit mistakes aren’t as obvious as this however and, to be sure, one of the biggest credit mistakes that people make, and one that few people actually know they are making, can actually happen when a person is trying to be financially responsible and increase their credit score.
This mistake? Closing a credit card account that you just paid off. The simple fact is that, depending on your actual financial situation, it actually can be devastating to your credit score to call your credit card company and ask them to close your account.
The worst part about this may be that you won’t actually see the implications of what you’ve done for 10 years, long after the account was closed and you’ve forgotten all about it.
Here’s how it works. Once you close an account you will have 10 years to benefit from these zero delinquencies that that account accrues but, at the end of that 10 year period, that account will drop off your credit report completely and when it does all of the excellent history that it gave you will drop off with it. This could lead to a very big surprise that you weren’t expecting in the least, a huge dip in your credit score.
Unless you’re able to find a card with a much better interest rate and the new card has a credit limit that is equal to or more than the one you’re closing you should avoid closing any credit card that you have. If you can do this however it may lower the ‘age’ of your credit history and may only cause a minor hit to your credit score.
Closing a card because it was used fraudulently or if you’ve recently gotten divorced and have separated your bank accounts are both good ideas. Also, if you have a credit card that has a high annual fee but you never use it then you might consider closing it. On the other hand, unless the fee is really exorbitant you may consider keeping that account open for the benefit that it has on your credit score.
How much of your available credit you actually use also greatly affect your credit score. This is called your credit utilization ratio and, generally speaking, the less of your total credit line that you use the better. In fact, most experts will tell you that you should keep it at around 10%.
For example, if you have approximately $20,000 worth of credit that you have access to and you’re currently using 50% of it then your credit score is going to take a huge hit, especially if you pay off a credit card or two and then close the accounts.
That being said, when it comes to paying down debt we’re all in favor of doing just that. Getting out from under a huge amount of debt can really give you some breathing room and allow you to reset your finances and start building them up again. Will once it’s done however, rather than actually close any account why not just shred your card, put it in a safe deposit box or give it to your mom for safekeeping. All of these options, in our opinion, are better than actually calling your credit card company and closing the account.
We hope to save you a lot of insight into protecting your credit report from yourself. Make sure to come back and check our blog soon because we’re always writing about all sorts of financial stuff that we believe you will find quite valuable. See you soon.