Credit Cards
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This may not seem to make a lot of sense but keeping some debts open and active can actually help your credit. Your individual credit score hinges on your ability to make consistent payments on your bills. If you completely eliminate credit card debt you may fail to adequately show a consistent payment history.
Also, many people like to close their accounts after they eliminate credit card debt. This isn’t the best approach, either. The more active accounts you have, the better your individual report will look to future creditors. When you eliminate credit card debt you still want to keep the cards active for show.
When a potential creditor looks at your report he is looking to see your past history as well as your current capacity to pay. The last thing that a creditor wants to see is a bunch of closed accounts. This is especially true if the person decided to eliminate credit card debt all at once and closed all of the accounts at once.
When the accounts are abruptly closed this sends a red flag to the potential creditor. He really wants to track your payment history but instead he faces a brick wall of closed accounts. While it is great to have your accounts paid in full it really doesn’t do much for your payment history.
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I used to work as a loan officer and we would cringe when we had a potential client who barely passed the rigid requirements for a low interest loan. In many cases the individual didn’t meet the requirements because he abruptly decided to eliminate credit card debt. Following that, he closed each of the accounts.
We really needed to see current action on his report but sadly there was none. We either had to turn down the application or offer a loan with a higher interest rate. In order to keep a strong credit report it is important to keep your accounts active and open.
This is not to say that you shouldn’t eliminate credit card debt. However, it is better to eliminate it every month by paying a small balance in full rather than paying everything off in one lump and closing the accounts.
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