Paying off your credit cards- What difference does it make to your score?

When you repay the credit card balance, your credit score is affected positively. However, if you decide to close the credit card, there would be negative impact on your credit score, at least for the short run. The credit scoring calculation wouldn't just look at your credit card balance. It would also consider something called utilization rate which is the total amount of credit you have used over the total credit limits that you receive from your credit card issuing corporations.

For instance, when you have two credit cards and each of the two cards has a limit of $2000, the total your credit limit $4000. If you have used $1000 of your credit limit, the utilization rate is 25%. However, if you cancelled one card, the utilization rate would instead be 50% because you have only $2000 credit limit left and you've used $1000. When the utilization rate increases, this indicates that you are utilizing a larger proportion of your credit limit which would indicate that you're not having a good credit situation. Thus, your credit score would decrease.

But in long term, the score would increase because you have established you can find a way to survive within the limited credit limit. Therefore, the long term effect could be positive so long as you can have a lot of active accounts to sustain your credit.

Now that you know all of this, it's important to put it to use right away. Find out what your score is right here. The sooner you take the next step, the sooner you can start reaping the benefits of a good financial reputation.

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