Don’t Hurt Credit Repair Efforts by Closing Credit-Card Accounts

Educated consumers understand just how important credit repair is. Lenders and banks passing out mortgage, auto and personal loans rely heavily on consumers’ three-digit credit, or FICO, scores to determine who gets money and how much they have to pay for it. If you have a credit score of 720 or higher, earned by paying your bills on time and managing your revolving credit-card debt, you’ll qualify for the lowest interest rates. If your score is under 620, you might not qualify for a loan at all. And if you do, you’ll pay far higher interest rates for the privilege. But while consumers understand that paying their bills on time and reducing their debt levels are the keys to effective credit repair, some make the mistake of going too far: They close out too many of their credit-card accounts after paying them off.

You Need Credit Cards for Good Credit Unfortunately, consumers need open credit-card accounts to have high credit scores. That’s because the three national credit bureaus, Experian, Equifax and TransUnion, monitor how wisely you use that credit. If you have a history of paying your credit-card bills on time and not carrying a huge balance from month to month, your FICO score will improve. But if you don’t have much credit at all? Your score will fall. It may seem counterintuitive in these dismal economic days, but it actually makes better financial sense to keep most of your credit-card accounts open.

Credit Utilization Ratio The USA Today’s financial columnist Sandra Block recently wrote about the impact that the credit bureaus’ credit utilization ratio can have on credit scores. This sounds complicated but, in reality, is rather simple: The bureaus like to see consumers whose revolving debt is only a small percentage of the amount of credit they have available. This means that if you close too many open accounts, thus reducing the amount of credit you have available, your existing debt will take up a larger percentage of available credit. This lowers your credit score, hampering your efforts at credit repair.

Use Credit Wisely The best solution is, as always, to use your credit cards wisely. It’s OK to purchase items with your cards as long as you have the funds available to pay them off when your credit card bill arrives. It’s even OK to carry over a small balance from one month to the next. Again, if you have the ability to pay down that balance fairly quickly, your financial health should not suffer. Credit repair can be tricky business, especially when it comes to credit cards. The key, then, is to use your credit cards as one financial tool, not as the way to cover your basic living expenses.

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