Keep your credit utilization low; don't close paid-off card
By Erica Sandberg
May 12, 2015
I took out a balance transfer card with my husband to pay off my other credit card. Do the two cards look bad on my credit report after having just one? Should we close the first? We are doing well so far and want to get debt free in one year before the zero interest rate goes away. It scares me that we could go wrong after trying so hard. Thank you. –Alison
You may have heard that it is better to keep older accounts active. In a way, that's true. FICO, the most common scoring model used by lenders to assess your creditworthiness, factors in length of credit history as well as types of accounts in use. That means that having multiple accounts you've used well for a long period of time is beneficial, although if you closed the older account, the good spending patterns would still remain on your credit reports for 10 years.
However, there is one very good reason to keep the older account open. If you keep the balance on your older card at zero, that will also aid your FICO score, because FICO weighs heavily how much available credit you have compared to how much you owe, which is called your credit utilization ratio. If you close the older card, your credit utilization ratio will be higher since you will lose that credit line, which will not reflect well on your FICO score.
I'm a big believer in making life easy for yourself, however. Put measures into place that will help you remain on track. The ability to get into debt by having two or more lines of credit may be too much temptation for you, as might having too much available credit. If you want to close unnecessary accounts or lower your credit limit and think that will help, do it. I can't make that determination, but you and your husband can. Decide on what will work best for you, as a unique couple.
Just keep in mind what really makes for a great FICO score is borrowing money while maintaining a perfect payment pattern and carrying little or no debt.
Regarding your concerns about debt, I understand that feeling of finally taking the right course of action after going through hard financial times, then worrying that you'll slide back into trouble with one mistake! Try not to worry, though. You can prevent debt and disaster from recurring. Here's how, in four easy steps.
1. Set a fixed payment. Determine exactly how much you'll need to send the new card company so you will delete the balance before the promotional period ends. For example, if you owe $2,000, you'd need to send $182 every single month to work down the entire balance in 11 months. Why not 12 months? It's always better to pay extra and be done a little early if you can. It's like arriving at appointments 5 minutes ahead of schedule. It feels good not to rush.
2. Set up automatic bill pay. You can do this with either the card company or your bank. Whatever the case, just plug in the figure you want deducted from your checking account and then have it transferred to the new credit bill. Just be absolutely positive you have enough money in your checking account to cover the payment on the selected date. If you're short funds, it will result in a late payment, which will probably nullify the 0 percent transfer rate deal.
3. Monitor your statements. Even when using the automated pay-off system, it's up to you to make sure all is going according to plan. Mistakes happen, so get used to reading your statements at least once a month — more frequently, if possible. Then you can jump on the phone if anything goes amiss.
4. Do not add to the new debt! This is critical. Assuming your true goal is to be in the black at the least possible cost, you must avoid using the new credit card, as well as adding to the balance on the old card if you choose to keep it open. Remember your credit utilization ratio? Charging more will only complicate the issue.
If you do charge with either card, commit to paying the balance off every month. This way you can guarantee that great information is being added to your credit reports, and you won't be socked with another balance to contend with after the balance transfer debt is eliminated.
As for your fears, when you gain control over your credit card debt and start to charge in beneficial ways, in time they should naturally wane.
Got a question for Erica? Send her an email.