How cutting up a credit card affects your credit score

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• 10.25.2012 | Stephen Morrisey

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COURTESY: Reuters

We've all been there: After finally paying off a credit card balance, you want to vindicate your hard work by cutting the card in two and closing the account. It makes sense. Why keep a card around that may tempt us to spend more than we'd like again?

While cutting up credit cards might make us feel more on top of our finances, it's not necey therapeutic for your credit score. Even cards that you don't use anymore and carry sky-high interest rates can help your credit score. And here's why:

Old credit lines boost your score

The more history you have as a, the better your credit score should be. (Your credit score is a three-digit number, which the three main credit bureaus calculate based on your past payment history, that lenders and creditors use to determine you will pay them back in time

"I once had a client who wanted to close down a retailer retailcredit card because it had a 43 percent interest rate"

Even though you may no longer use the credit card you opened in college, closing the account entirely could negatively affect your profile as a borrower. Closing your oldest accounts makes you look like a newer borrower, says Wayne Sanford, a credit expert in Dallas and author of "The Real World on Credit."

Closing accounts can hurt your debt ratio

Credit scores are determined, in part, by your debt-to-credit ratio. Make no mistake, paying down your credit cards is a good thing, but closing the account entirely could possibly lower your score.

Say, for instance, you have two cards with a $1,000 limit on each card. If one card has a $500 balance and you just paid the other card down to zero, your debt-to-credit ratio is 25%, you hold a $500 balance out of $2,000 possible credit. If you close the paid-off account, your ratio will spike to 50 percent because you'll have eliminated $1,000 of possible credit.

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