Working on building your credit score? Don’t close any credit card accounts just yet

If you're working hard to build your credit score and you have paid off a credit card, should you close the account?

In short, the answer is no. But with a caveat.

Why you shouldn't close credit card accounts, even if they are paid off and you no longer use them

Closing a credit card can increase your usage percentage and have a negative impact on your score. If you are unfamiliar with what a usage percentage is, this is an easy example. Let's say you have two credit cards each with a $10,000 limits, your total credit is $20,000. If you have a $5,000 balance on one of those cards, you have a credit usage of 25%. This is considered a good credit usage. However, if you close one of these cards, you now have $10,000 total credit with a $5k balance and your credit usage percentage has gone from 25% to 50% without spending a dime. This increase in your usage percentage can harm your credit score.

You can also hurt your credit score when closing a credit card that you've had for a long time. Credit products with a long history reflect well on your score, which is why closing an old credit card account can have a negative impact. These same issues can be presented by closing other types of revolving credit, such as lines of credit, as well.

The caveat

For some people, the temptation of a credit card with an available balance on it is too much. Unless the account is closed, they will end up using the card and once again get into debt. In these cases, it is recommended that you do close the account. Credit building, while important, is second to staying out of debt as much as possible. Also, if you are paying an annual fee on the card, it's better to cancel the card as the annual fee can add up over time, and you might even forget that you must pay it, causing all sorts of credit problems down the road.

When used properly, credit cards are a exceptional tool for building your credit score. However, it's critical to know what makes up your score and how your financial habits can affect your score. We cover this in our blog "What is credit and how do I build my credit score?"

Refresh financial offers custom credit building solutions to help you build your credit score FAST.