Millions of consumers nationwide are now making serious efforts to reduce the amount of money they borrow on their credit cards, and many of them are also doing so as a means to stop using these accounts for everyday purchases altogether.
However, it’s important to note that there is a right way and a wrong way to deal with a credit card once the balance has been paid down to zero. One of the biggest mistakes made by many consumers who successfully pay their credit card balances in full is that they close the account. While this might seem like a good idea—as it will certainly help to avoid the temptation of using the card again—it can actually end up having a negative effect on a borrower’s credit standing for two reasons.
The first is that a significant portion of a borrower’s credit score is based on the amount the person is borrowing versus the total amount of their credit limits. For this reason, closing out a credit card entirely can reduce their total credit limit across all accounts by thousands of dollars, significantly increasing their debt utilization ratio and therefore reducing their credit score.
Another similar consideration is that part of a borrower’s credit rating is also based on the average length of time they’ve had their various lines of credit, meaning that closing out a card they’ve had for a number of years will likely cause this figure to decline.
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Although it’s not advisable, some might weigh a decline in credit score to keeping the account open in some cases, as many credit card accounts these days now come with annual fees, which may be significant. But for accounts that do not come with an annual fee, consumers should generally try to keep the account open as long as they can, even if they never use it, as their credit rating will not be negatively impacted when they do so. It might also be a good idea to keep the account open so that they can use it in the event of a financial emergency.