A couple of weeks ago I told the story about the New York City couple who paid off $88,000 in credit card debt in three and a half years. After that story I received an email from a Colorado Springs couple who just paid off $80,000 in debts and loans. Congratulations to them! Another example that credit card debt can be paid off once you put your mind to it.
This couple asked an interesting question concerning how they could improve their credit score after paying off all this debt. What should they do with their cut up credit cards, keep them open or formally cancel them?
My answer depends on whether you are likely to misuse credit cards from this point forward.
Credit card abuse is like an addiction, if the card is available, it might be misused. Even if a credit card is cut in half or sitting in the freezer, the account is still active and the number can be used/misused for online purchases like an around the world air ticket or a big screen TV. My recommendation for potential abusers is to formally cancel all the cards after they are paid off by sending a letter to each company. How this affects their credit score is less important than the potential misuse.
For those who will not misuse their credit card, it might be a good idea to keep one or two cards active, but be sure to pay off the balance each month. It is my understanding that an active credit card with a zero balance has little, if any, affect on your credit score. The same goes with debit cards. The credit score software looks at only how much you owe at any particular time compared to the credit card limit. The software also is very strong on paying on time. Therefore, it is wise from a credit score perspective to have a small amount on a credit card with a high limit. Another important factor is credit history, how long you have had the card.
My advice is to keep two cards. One card should be the one you have had the longest. The other, the one with the highest credit limit. Cut up the rest and send letters formally canceling them. Make one small purchase every month on each card and pay the bill in full the moment it is received. Then periodically ask the credit card companies to increase the limit on each of your two remaining cards. It may take awhile, but if you persist you can raise the limit, which in turn will help your credit score.