Recent Divine Discussions

Saturday, March 17, 2007

Closing the credit cards that you have paid off

Another no-no that I forgot to mention on the last post is about closing you credit cards after you have paid them off.

Do not close any of your cards right after you have paid them off.

I left all my cards open. Some people close their credit cards as soon as they pay them off. This actually hurts you. One of the five factors that credit reporting agencies take into account when figuring out your credit score is the proportion of balances to credit limits on your revolving/charge accounts. Meaning they evaluate your total balances in relation to your total available credit on revolving/charge accounts, as well as on individual revolving/charge accounts. For a given amount of revolving credit available, a greater amount owed indicates a greater risk, and lowers the score.

The five factors that determine your credit score are the following:

  • Payment history – 35%
  • Amounts owed – 30%
  • Length of credit history – 15%
  • New credit – 10%
  • Types of credit used – 10%
I have a total of 11 credit cards. LOL. Yeah yeah....i know! Based on their APR,how long I have had them, and what types of incentives they offer on purchases, I have determined which ones I want to keep (5) and which ones will be closed (6). The closing process I have set up starts in August, 5 months after I paid the cards to be closed off and 4 months before I have paid off all my debt. All cards will not be closed at once. I will be closing them in one month increments, closing the card with the lowest credit limit first. That way it doesn't greatly impact my "credit balance-to-credit limit" ratio. I will have my credit cards paid off by 12/31/07 and my unwanted cards closed by 1/1/08. NIIICCEEEE!

I have attached my credit card debt analysis below. My
"credit balance-to-credit limit" ratio is 49.87%. If I had closed the credit cards I paid off my ratio would have been 96.28%! Horrible! Now do you see the difference. After doing some research the ideal ratio is between 35-40%. Ideal when you are trying to buy a home. Having less than 50% is actually pretty good. Paying another $2517 will get me down to the 35% I need before I can start house hunting.

I am closer and closer to my goal. What would be perfect right now is a raise or bonus at the old jobby job. ;-).

Dimps out.


Debt said...

Yeah, I was messing myself up in the beginning closing credit cards because I didn't know it could hurt my score. You're doing good!
PS -- Thanks for stopping by my blog!

Credit Cardholder said...

Right! Once I have made such mistake and have suffered from this. No more mistakes in credit card use. Thanks for sharing. This is an important topic.

CreditAdvisor said...

I work as an advisor at a credit-related website and I can say a lot of people asking for my advice can't just make a list of their cards and work out their debt reducing plan, which can as well as can not include card closing. I will recommend your method as simple and effective one.