Dear Credit Care,

Hi! My husband and I are working to pay off our credit cards and get away from credit card debt. We have read that canceling a card hurts your credit score. We are wondering what we should do with each card once we pay it off. Do we cancel it or hold onto it? Our question is: How do we get out of credit card debt without damaging our credit score? 

-Andrea

Dear Andrea,

Congratulations on working to pay off your credit card debt. You and your husband are making a smart financial move that will help to build a solid financial foundation moving forward. Before I get to your question about paying off your debt without negatively affecting your credit scores, I want to give you some additional advice to help secure your financial future.

To avoid unwanted credit card debt, the best solution is an emergency savings cushion of six to 12 months of expenses. Notice I said, expenses, not income. You are, I hope, spending less each month than what you earn. So, if you don't already have an emergency savings account, start one today and watch it grow or add to the one you have established if you haven't saved enough to cover six to 12 months of expenses. Then, when life throws you those unexpected expenses that we all face, such as a broken washing machine or leaking car radiator, you will be prepared with the cash to handle them rather than relying on expensive credit.

Paying down your credit card balances will help to increase your credit score because one of the components that is included in credit scores from both FICO and its competitor VantageScore is how much you owe on your accounts. For FICO, how much you owe is 30% of your total score; for VantageScore, it is 23%.

For revolving accounts such as credit cards, how much of your credit limit you have used -- known as your debt-to-limit ratio or your utilization ratio -- is what is important. You want to have used less than 30% of your total credit limit, and the more you lower that percentage, the better it is for your credit score. So, every payment you make that drops your total balance on your credit card accounts is helping to improve your credit score.

To get back to your original question, the length of time that you have had credit is another component of your credit score. Length of credit history is 15% of your total FICO score; for VantageScore, it is 9%. As long as the account is in good standing, it will remain on your credit report for 10 years even after it is closed. So, closing your credit card accounts once they are paid in full may affect your length of credit history, but only when they are no longer reported.

I would recommend that you base your decision on closing the credit card accounts on whether you believe having the available credit will tempt you to use it. If you would be tempted, it may be better to receive what could be a slight hit to your credit score than to charge up those cards again. If you do decide to keep the accounts open, be sure to keep tabs on them even after the debt is repaid. This will help you to quickly identify fraudulent use.

Handle your credit with care!

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