Your credit score could have taken a dive after paying off a credit card if you closed that credit card when the balance hit zero. While paying off and then closing the card may have been your goal all along, the action could actually hurt your score. This is why it’s usually best to keep credit card accounts open even if you don’t use them frequently.
If you close a credit card, your credit utilization ratio will likely increase. That’s the proportion of available revolving credit that you’re using at any one time. Experts recommend keeping utilization below 10% to avoid damaging your scores, and in the single digits to maintain the highest credit score possible. Because closing a card will reduce the amount of available credit you have, your scores could take a hit.
For example, let’s say you have three credit cards that have a combined credit limit of $12,000. You pay off the balance on one of the cards and close it, bringing your combined limit down to $4,000. If you have a $1,500 balance across the other two cards, and you maintain that balance after closing the third card, your total credit utilization will climb from 12.5% to 37.5%.
In this case, it would be better to keep the third card open but use it sparingly so that you can benefit from its credit limit without adding to your debt. Our credit counselors here at Credit Services of America can provide you financial advice, we have over a decade of experience we will use to help you with your specific goal.
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