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Pay off balances or close accounts to boost credit score?

Dear To Her Credit,Which is better if I want to increase my credit score -- loweringthe credit card balances (keeping them open) or closing some of them? I havesix credit cards and have the opportunity either to close two of them or tolower the balances of all of them. Please advise.  -- Maria

Dear Maria,Paying off credit cards and closing them are two separateissues that affect your credit score in different ways.

Closing accounts can help or hurt your credit score. Closingexcess accounts you don't need may help in your case, because you're losingpoints by having six open accounts. Try to keep the accounts you've had thelongest, because they reflect more favorably on your credit history. If you dochoose to close an account or two, close the newer accounts and don't closethem at the same time -- space it out over a couple of months.

Closing card accounts can hurt your score if it reduces yourtotal available credit too much in proportion to your total credit card debt (otherwise known as your credit utilization ratio). Beforeyou close any accounts, make sure after you do that your total credit card debtwill not exceed 30 percent of your available credit.

In your enthusiasm for improving your credit score, don'tforget your overall financial well-being. Minimizing your interest expense soyou can get out of debt and work toward other financial goals should also be atop priority.

Here's how to use this opportunity to pay off some debts toyour best advantage:

1. Make a list of your credit card debts. Includethe balance, minimum payment and interest rate for each account. Add up thetotals for the balance and minimum payment columns.

2. Sort the accounts by interest rate, highest tolowest.

3. Decide what to pay first. Consider these factorsin order of importance:

  • If any account is charged up almost to the limit, pay it down until you are in no danger of accidentally going over. Over-limit fees are brutal. Never get too close to your credit limit!
  • If one or two accounts have significantly higher interest rates, pay them off completely. This saves you the most money every month in interest expense.
  • If the interest rate is very close on all your accounts, pay off the smallest accounts or the accounts you think you might want to close. Paying off small accounts gives you a feeling of accomplishment and reduces your total monthly minimum payments.

4. Next month, continue to pay the same amount youusually do toward your credit card payments. Only now, because your balancesare lower, less of your payment goes to interest expense and more goes topaying the pesky balances off.

Your eventual goal for maintaining an optimum credit scoreis to have a few long-standing credit cards (not six), that you keep completelypaid off.

What a great chance to pay off your debts -- not just twocredit card accounts, but eventually all of them. Think of the freedom andsense of relief that would bring! Good luck, and take care of your credit!

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