Q. I have six credit cards that I would like to pay off and close. Is that a good idea or would that hurt my credit score?
A. There’s no question that it’s a good idea to pay off your credit card balances.
Closing the accounts is another matter.
This can negatively impact your credit history, specifically your credit utilization and your length of credit history , said Sheri Iannetta Cupo, a certified financial planner with SageBroadview Financial Planning in Morristown.
“If you really must close out some credit cards, consider cancelling the newer cards with less credit history and/or the ones that come with high fees,” she said. “If you are considering applying for a mortgage or car loan any time soon, then wait to close the cards until after you’ve finished these transactions.”
Cupo said when deciding whether or not to close a credit card, there are a few things to consider.
First is your length of credit history and your older credit cards.
“If these are older cards that you are planning to close, then closing these old cards could wipe out all of your old credit history – including the good kind,” Cupo said.
One of the factors that go into your credit score is the age of your oldest account. If these cards are not charging you an annual fee, then it might make sense to keep them open and only use them for a few small purchases to keep them active, Cupo said.
Then there’s your utilization ratio.
This is the amount of credit you are using divided by the total amount of credit that you have available to you, Cupo said.
“When closing a card, your total available credit will then drop by the line of credit that you just closed,” she said. “This will, in turn, increase the utilization ratio and could have a negative effect on your credit, unless you also scale back the spending on your credit cards to keep the ratio the same.”
On the other hand, if your cards have annual fees that are not paying you back with cash back or other rewards, it may not make sense to keep the cards, Cupo said.
You can try to ask the provider to drop the rewards features of the card and lower you to a card with no annual fees, but not erase the history or lower your total available credit, she said.
You also have to consider your spending habits.
“If you are not able to control your spending and the fact that you have the line of credit seems to cause you to accumulate debt, then it may make sense to close the account,” Cupo said. “It can be detrimental to you financially to rack up large credit card balances and start carrying them over from month to month with the high interest rates that are charged by the providers.”
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