Daily Dupaco

Tuesday, March 23, 2010

Protect your credit score when closing accounts

Credit card companies are imposing new and creative fees as they react to the credit card reform law. As a consequence, like many Americans, you may be afraid you'll get hit with an inactivity fee for not using a credit card. But closing that account could hurt your credit score. What to do? (USA Today March 9)

It's a tough call but, if you're careful, you can close the cards you don't use with little effect on your credit score. The best strategy is to pay down all your balances before closing any credit-card accounts.

Here's why: Your credit-utilization ratio--the total of your card balances divided by the total credit limit on all of your cards--traditionally has been the second-most influential factor in your credit score. Since the three credit bureaus rolled out a new formula to calculate scores in 2009, that credit-utilization ratio may be the most influential factor in your credit score.

If you close cards you haven't used in awhile without paying down the others, your total balance due becomes a higher percentage of your new, smaller, overall limit. Your credit-utilization ratio goes up. The best credit utilization is 0%; a good utilization ratio is less than 30%.

And it doesn't matter if you pay your credit card balances in full each month. What counts in credit scoring is the amount you've charged that month, because you never know on which day the score is calculated. Your best strategy: Pay down your balances before closing any card accounts to minimize the impact on your credit score.
Comments (0)

Post a Comment

Please provide your information. Name and email address are required. Email address will not be displayed with the comment.
Comment Title:
Please enter the code shown in the image

Thank you. Your comment is being reviewed and if approved, will be posted shortly.

Related Content
Daily Dupaco Archive
Get up to $300 cash back* with a Dupaco Home Equity Line of Credit
For a limited time, get $600 off closing costs with a Dupaco mortgage loan