Editor’s note: This is a transcript of the audio file.
So, you want to reduce your credit card debt? That’s a great financial move. But, before you start closing accounts, be mindful of mistakes that could hurt your credit score. I’m Daniel Miranda with your Bankrate.com Personal Finance Minute.
One of those potential mistakes is closing credit card accounts without understanding how it will affect your score. A major component in the calculation of your score is how much you owe compared to your credit limits on revolving accounts.
That ratio is figured for each credit card and across all of your credit cards. A lower utilization ratio is better for your score. When you close a credit card account you’ve paid off, the credit limit from that account will no longer count toward your overall utilization. This change can inflate your utilization ratio even though you haven’t taken on any additional debt.
Ideally, you want to keep credit cards with high limits and long payment histories. Closing high-limit credit cards can affect overall utilization more than low-limit cards. And when closed accounts eventually come off your credit report, it could have an adverse affect on your length of credit history.
To learn more about credit cards and scores, log onto Bankrate.com. I’m Daniel Miranda.