Step 5: Keep Accounts Active
Some people will tell you to get rid of any credit cards you aren’t
currently using. And if you’re a shopaholic who can’t have a credit
card without maxing it out, that’s probably good advice.
Fair, Isaac & Co. and other credit rating experts point out that if
you want to improve your credit scores, think twice before you close out
an account.
Instead, the best goal is to get your outstanding balances to about 30 to
50 percent of your total available credit.
For example, let’s say you’re thinking about closing an account
with a $10,000 credit limit. Right now, your outstanding balance on your two
other cards is $10,000. The credit limits on those two cards adds up to $15,000.
If you get rid of the card with the $10,000 credit limit, then your ratio
of credit to debt is 67 percent. If you keep the card, your ratio is 40 percent.
You can make the dramatic move of cutting up the card—but keep the
account active. By keeping it, you look better on paper. You look further
away from maxing out your existing credit cards. And that translates into
a better credit score.
But you may not want to keep that third card with a zero balance. Some experts
say lenders would rather see three credit cards at 20 percent of their limit
than two credit cards with a zero balance and one at 80 percent of its limit.
Of course, paying down your balances will have a much better effect on your
score than just moving those balances around. But spreading out the debt can
have a positive effect.
Next: Step 6 - Avoid New Credit |
