If you're trying to get your credit scores back in order after they took a little bit of damage, you might have undertaken the very wise task of trying to reduce your various outstanding balances as much as you can. This can have a huge positive impact on your standing and your overall finances, because it means you will have to devote less money to paying your credit card bills every month.
However, you may come to a crossroads after several months or more of these efforts: As you begin to approach a zero balance, which should be your ultimate goal when dealing with any kind of obligation, what are you supposed to do with those cards once the debt is all paid off? On the one hand, leaving it open so that you have a little bit of potential financial flexibility if you need to rely on the card again may be wise, but having the temptation to use it again could also be considerable.
One thing many people who come to this decision point may not consider, however, is that there are credit score implications that come with closing an account versus leaving it open. The most substantial will likely come as a result of what is known as "credit utilization ratio," which is an industry term for the amount of money you owe to lenders versus your total account maximums. For instance, if you have limits that combine to $10,000 across four cards, and you owe $5,000, your utilization ratio is 50 percent. In order to max out this part of your score — which makes up 30 percent overall — your utilization ratio should also be, coincidentally, 30 percent or less.
But if you close your account, your utilization ratio can come down considerably, as you will be cutting, say, $3,000 from your maximums even though you owed nothing on the card itself.
Similarly, if you close your card, you might also reduce the average age of all your accounts, which makes up another 15 percent of your score.
Of course, other things, such as unfair markings, might be hurting your credit scores as well. Consequently, if you take the time to order copies of your credit reports and check them over closely, you may be able to spot these problematic entries. Working with a credit repair law firm may help you to clear up these issues quickly and easily.