If you are hoping to rebuild your credit score, paying off your credit card debt is a great way to do so. As you pay down debt and reduce the amount that you owe, your credit score will increase with timely payments.
In addition, the faster you pay down your credit card debt, the more money you will save in the long run – and by paying your credit cards back, you can avoid defaulting. Defaulting can result in a “charged off” account that is sent to collections – which can cause a huge drop in your credit score, and remain on your credit report for up to 7 years.
But what should you do after you finish paying off an old account? While some people think you should close it, this is not always the case. Read on to learn more about whether or not you should close your credit card accounts!
Avoid Closing Credit Card Accounts – They Can Help Build Your Credit Score!
As a rule, this is the best advice for rebuilding your credit score. Your FICO score is based on a number of factors. One of these is the length of your credit history. Closing an account that you have had for a long time can lower the length of your FICO credit history, causing your score to drop.
In addition, having a number of open credit card accounts with no balance helps reduce your credit utilization. A low credit utilization of under 20-25% can help boost your credit score. Credit utilization is calculated by comparing your total credit card balance with your total available credit.
For example, if you have $500 on a credit card, and $5,000 available across three different cards, your utilization is 10%, which is excellent. Keeping a credit card account open after it’s paid off helps reduce your utilization, which boosts your credit score, in turn.
The Exceptions – 3 Reasons To Close An Old Credit Card Account
As you can see, it’s often a good idea to keep your old credit card accounts open after you’ve paid them off. But there are some exceptions. Here are 3 reasons you may want to close your old credit card accounts.
- You’re Paying A High Yearly Fee – Some credit cards have extremely high yearly fees, ranging from $95-$500 or more. These credit cards usually offer great rewards, such as deep discounts on travel and great cash-back rewards – but if you don’t plan on using the account, it’s not worth paying this extra fee just to keep the account open.
As a rule, you should cancel any accounts with a yearly fee, and focus on rebuilding your credit with credit cards that do not have any kind of associated fees. While this may impact your credit score somewhat, saving this money will help you pay down other debts, and secure your financial future.
- You Don’t Trust Yourself To Use It Responsibly – If you have paid off a credit card with a high balance, and you don’t think you can keep using it responsibly, you may want to cancel the account. It’s better to have your credit score drop a little bit than it is to get back into serious credit card debt.
- You Want To Make It Easier To Pay Down Your Balance – Some credit card companies will actually let you close an account while you have an outstanding balance. You will still owe the balance and interest, but be unable to make new purchases on the card. This can make it easier to avoid overspending, and pay down the remainder of your balance.
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It can be difficult to rebuild your credit, even if you are paying down your credit card debt and making good financial decisions.
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