When you pay off a credit card is it better to reduce the credit limit or close the account?

Question

I've heard that once you pay off a credit card you shouldn't close the account to keep a good credit score. I've also heard that even though one pays off his credit card reducing the credit limit is also not a good option for keeping a great credit rating. What is the best way to handle this situation if you don't really want the card around to prevent you from running the balance up, but also don't want to hurt your credit rating. Is there any way to find out what exactly affects one's credit score?

Examples: Let's just say a website or book states something like filing for bankruptcy subtracts XXXX amount of points from your credit rating. Defaulting on credit card payments for XXX amount of months subtracts XXX amount of points from your credit rating. Paying off federal student loans adds or subtracts XXXX amount of points from your credit rating. Also is there anywhere that states how long certain things stay on your credit report?

Answer 1

Your credit rating is higher when you debt to credit ratio is at its best. In other words, having a high credit limit with little to no balance on it will yield a higher credit score than having a lower credit limit with the same balance.

That being said, however, if your spending habits are poor and you cannot help but to run up your card, then lowering your limit may be an option. Simply, you want to avoid being in a position where your balance and payments are so high that you start being late on payments b/c that will really lower your score.

I believe the "high balance" you reach on your car stays for 12 months. This means that if you max out your credit limit, it will show as your high balance on your credit report for 12 months. Only after that high balance falls off will your score improve from it.

My practice with credit cards os to use them for unforeseen emergencies only (i.e. unexpected car repairs, etc.) That way I use it only for needs most of the time. If I use it for "wants", i.e. travelling, ipods, etc- it is because I know I can pay it off within a short period of time, typically. That way, you can live within your means, have an emergency source of fund should the need arise, and only get "toys" when you can really afford to.

If you want more detailed information on the many things that affect credit score, and how to keep up your credit score, check out Stephen Snyder's website:
www.lifeafterbankruptcy.com

Keeping a good score matters in an age where we pay higher insurance rates, etc. based on our score!

Answer 2

Chop up that little plastic loan shark, and close the account. Never buy on credit. Then, so what if your credit score drops a few points if you're not buying on credit? Why worry about something you don't use?

Use debit cards. Forget the $600 month car payments - get what car you can with cash.

If you absolutely must borrow for a house, get no more house than you can pay at least 20% down, and no more than 25% of your take home pay in payments for a maximum of 15 years.

Answer 3

I would pay off your balance but leave your account open. Credit Card companies hate when people close out their accounts since that means they are losing money. You can also call the credit card place and ask them to reduce your available credit. If they say they can't do that, then mention you will probably close your account. They will change their minds real fast and offer you anything to keep your account.

I have closed credit card accounts before. While I insisted they close it, they offered everything to keep it open. They even suggested keeping a credit line of $100 and keep the account open. I still closed out their accounts.

The best way of insuring you will not use your credit cards is simply cut them up and throw them out. Out of sight - out of mind. When you get another card for renewal, just cut it up and don't activate it.

Answer 4

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RE When you pay off a credit card is it better to reduce the credit limit or close the account?

I've heard that once you pay off a credit card you shouldn't close the account to keep a good credit score. I've also heard that even though one pays off his credit card reducing the credit limit is also not a good option for keeping a great credit rating. What is the best way to handle this situation if you don't really want the card around to prevent you from running the balance up, but also don't want to hurt your credit rating. Is there any way to find out what exactly affects one's credit score?

Examples: Let's just say a website or book states something like filing for bankruptcy subtracts XXXX amount of points from your credit rating. Defaulting on credit card payments for XXX amount of months subtracts XXX amount of points from your credit rating. Paying off federal student loans adds or subtracts XXXX amount of points from your credit rating. Also is there anywhere that states how long certain things stay on your credit report?

Answer 5

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RE :When you pay off a credit card is it better to reduce the credit limit or close the account?
I've heard that once you pay off a credit card you shouldn't close the account to keep a good credit score. I've also heard that even though one pays off his credit card reducing the credit limit is also not a good option for keeping a great credit rating. What is the best way to handle this situation if you don't really want the card around to prevent you from running the balance up, but also don't want to hurt your credit rating. Is there any way to find out what exactly affects one's credit score?

Examples: Let's just say a website or book states something like filing for bankruptcy subtracts XXXX amount of points from your credit rating. Defaulting on credit card payments for XXX amount of months subtracts XXX amount of points from your credit rating. Paying off federal student loans adds or subtracts XXXX amount of points from your credit rating. Also is there anywhere that states how long certain things stay on your credit report?
6 following 31 answers

Answer 6

How your credit score is determined is a closely guarded secret. It's sort of like the baked beans commercial where the dog knows the recipe but he's not talking. It's believed that you should have NO department store credit cards and that the optimum number of bank issued credit cards is two. If the one you paid off is a department card, have the account closed. If it's one of two bank credit cards, you may leave it open. As far as trade lines staying on your credit report goes, typically it's 7-10 years, remember a credit report is your financial history

Answer 7

In order to earn credibility, one should atleast have one or two credit cards which should be paid in full each month to maintain good credit score. When lenders look at the credit report and see that your cards are paid in full each month they believe that the person is credible. In your situation, if you have two credit cards and you want to close one account, it will not have a negative impact on your credit score. On the other hand, if credit card company was to close your account for any reason, that will surely decrease your score. Also, it is never a good idea to have department store credit card because lenders look at that as negative debt. There are two kinds of debts: good and bad debts for example: home mortgage is considered good debt vs. car loan, which is considered bad debt. Therefore, department store credit is not a good idea although at that moment it may seem tempting. I would suggest you keep the account open and use it once in a while only when you know you can pay the balance in full at the end of the month. Hope this will help.

Answer 8

If you are planning to make a major purchase in the future such as a home or a car, you credit score will be higher if you just pay off the credit card and cut it up. Don't cancel it or lower your limit. Part of the criteria used in your credit score is how much of you allowed credit limits you have available.

Answer 9

I have a credit card that is basically maxed out. I still haven't paid it all yet. I cut the card up to prevent me from using it while I am still paying it off. No one has to know that you don't have the card anymore. When you pay it off and still want to keep the account open just say you recently lost you r card and need a new one.

Answer 10

it's best to cut that credit card up and burn it and forget you ever owned it and do nothing with the credit company. Let it be.
Yes there are sites that give you how long things stay on your credit.
Most is three years for lenders looking at your credit. seven years for past dues and none payment. 10 years for bankruptsy, and charge offs.. life time for government payments not made and student loans. i think

Your not a good risk unless you use your credit and pay it when it's due or before. And your ratio of money coming in as to money going out has to be with in a certain amount.
If you get cards and never use them, creditors don't know if you'd pay your bill or not if they gave you credit.