By Yvonne Marsh, CFP®, CPA

If you’ve worked hard to pay off a credit card and you’re super excited to be out from under the 20% plus interest rate, your instinct might be to close that credit card, so you’re not tempted to run up the balance again.  On the surface it makes total sense, just as you wouldn’t stock your refrigerator full of desserts after you just lost 10 pounds, why would you want to carry around the spending temptation in your wallet? But here’s the thing…you may also be accidentally hurting your credit score, just at a time when it might be super important to build it back up again.  Being aware of, and improving your credit score, is super important.  Higher credit scores translate into lower interest rates on future auto loans, mortgages and even what you pay for car insurance, so it’s critical you do everything you can to get it as high as you can.

Here’s why it can actually hurt your credit score when you close a credit card:  There is something called the Credit Utilization Ratio that looks at how much of your available credit you’re actually using by carrying a balance.  The more of the available credit you’re using, the lower your credit score. (Ratios higher than 30% typically start lowering your credit score.) So, if you close a credit card and reduce the amount of available credit you have, the remaining debt you have on other cards is a bigger percentage of your smaller total available credit.  This could make your Credit Utilization Ratio go up, which is moving in the wrong direction! A better answer is to leave the credit card account open and just put the card in a drawer, so you’re not tempted to use it. 

If you need to improve your credit score, an EVEN better answer is to use the card intentionally, and smartly, to charge a few things each month that you can easily pay off the next month.  Demonstrating your ability to use the card and pay it off in full each month will go a long way toward improving your credit score.  If even that feels too tempting that you might overuse it, then only charge something recurring like a Netflix subscription, and then set up an auto payment each month to pay it off.  Put the card in the drawer and you’re good to go building your credit score with zero temptation to go crazy at the mall. 

Congrats on paying off that credit card – I know that takes a lot of intentional decisions month after month, and I celebrate that.  Now it’s time to reap the benefits and build that credit score!