Should You Break Up With Your Credit Card?
Closing a credit card account you have paid off or don't use seems like a logical thing to do. But the "credit utilization ratio" is one of the major factors in calculating your credit score, accounting for approximately 30% of it, and closing an account can have a dramatic effect on that ratio.
|Closing a credit card account you have paid off or don't use seems logical. But watch out for how cutting up that card affects your "credit utilization ratio."|
When it comes to your credit cards, the credit utilization is the ratio of all your credit card balances to the credit limits available on your cards. Having a low ratio -- not having much debt but a lot of available credit -- is beneficial to your credit score, while a high ratio may indicate you may be a risk for default. A healthy credit utilization ratio is anything below 30%.
Closing an old or unused card erases some of your available credit and increases your credit utilization ratio. For example, say you have two credit cards -- one with a $3,000 balance and one with no balance, and each card has a $5,000 credit limit. Your credit utilization ratio is 30% ($3,000 divided by $10,000), a very attractive ratio for lenders to see. But if you close the account with no balance, you decrease your available credit by $5,000, so your credit utilization ratio increases to 60% ($3,000 divided by $5,000).