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Do What’s Financially Right For You

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Cutting up an AMEX Blue CardAfter my ABC News Now interview a few months ago, the cameraman, Chris, asked me a quick credit question. He told me that his goal for the year was to pay down debt, a laudable goal, in my opinion. Paying down debt, after you’ve saved for an emergency fund, is the best thing you can do for your finances. It’s especially important when your, and everyone else’s, personal economic outlook seems grim. Chris paid off and then canceled the first of his cards. He wanted to know whether that hurt his credit score.

Before we get to my answer, I want to stress one thing: You should always do what’s financial prudent for you and your family and ignore how it affects what other think about you, which includes credit bureaus and your credit score. If you are constantly worrying about what others think, you won’t be able to live life to the fullest and you will be doing yourself a disservice. You shouldn’t ignore the opinion of others but you shouldn’t let it stop you from doing the right thing.

Back to the question: Chris paid off $7,000 in credit card debt and then closed the card, because he wanted nothing to do with it anymore. The “best” thing he could’ve done, after paying off the debt, was to keep the card open but dormant. However, that wasn’t the best thing for Chris. The best thing for him was to close it because it prevents him from returning to the cycle of credit card debt. A card you don’t have is a card you can’t charge.

Did it hurt his score? Closing the account hurt his score, but paying off the debt improved it. In the end, it’s probably a wash but you can’t say for certain unless you know the nature of his other debts. As I mentioned earlier, the best scenario is if he paid off the debt and ignored the card, getting the credit utilization bump without the average account age hit, but Chris did what was best for Chris.

In the end, you have to do what’s financially right for you and yours.

(Photo: thetruthabout)

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14 Responses to “Do What’s Financially Right For You”

  1. Steven says:

    Why is your credit score important if you’re trying to pay down debts?

    Like you said, paying down the debt and closing the card is best for him. And if he is in so much debt, he shouldn’t be getting more loans/credit cards, so the ding to the credit score wouldn’t matter.

    Or am I missing something?

    • Jim says:

      It’s important because it’s like losing weight, you want to ensure your body is still healthy when you’re done. When you’re in a very dangerous situation, like cancer, you do chemo and take care of the dangerous situation first, effects come later. I don’t think debt is like cancer, it’s more like being overweight. So you want to address the problem and keep yourself healthy if you can.

      • Neil says:

        FICO scores are a measure of your credit risk. If you get out of debt by paying off your debts (as opposed to defaulting/bankruptcy), you will end up with a healthy credit score, because people loaning you money can expect to be repaid. It might not be AS high as if you’d optimized your score by keeping cards open etc, but it will be high enough to get the best interest rates when it does come time to borrow again.

        Credit scores are based on many factors, but they are not equally weighted. The single most important thing you can do for your credit score is PAY YOUR BILLS. The rest is just icing on the cake.

  2. I also don’t understand peoples obsession with their credit score, fix your finance first. Get out of debt, establish a savings than worry about having a good credit score, but those in debt often seem to be worried about their score than anything else. I don’t blame them for it, it’s put in our heads by the banks, lenders and reporting agencies….your credit score…..your credit score…

    • Jim says:

      I think fixing your finances is part of getting a good credit score, but I agree. Priority one should be to eliminate debt, then worry about your FICO score.

  3. Beth says:

    Thank you! I closed out two store credit cards I hadn’t used in years and later wondered if I was hurting my credit score. They weren’t a temptation (I don’t carry balances), but it just seemed like extra clutter in my life I didn’t need.

  4. Melody says:

    I recently went through a divorce. My ex and I cancelled all joint credit cards. I kept 2 that were in my name only. I have no debt and money in the bank. When I applied for car insurance on my own and they checked my credit – the insurance/credit rating went from Superior to very good. Do you think that is because we cancelled all of those cards?

  5. dilbert69 says:

    I think you should pay off debt before you establish an emergency fund, but then I’m a math guy. If you have $5K in credit card debt at 18% and $5K in the bank at 2%, you’re basically borrowing your emergency fund from your credit card at 16%. I’d rather have zero savings and zero credit card debt, so I’d pay off the card. Then I’d start saving. If before I saved any money I had a true emergency that could only be solved with money, I’d borrow on the card again and start paying it off aggressively when the emergency passed.

  6. “You should always do what’s financial prudent for you and your family and ignore how it affects what other think about you, which includes credit bureaus and your credit score.”

    Stupendous advice Jim!

    Life in the 21st century has become so complex that it’s impossible to do just about anything without using a flow chart or legal council to figure out the many possible outcomes. This is where paralysis by analysis kicks in and you become afraid to do anything.

    In most cases you just have to go with doing what your gut is telling you to do. You’ll never satisfy all of the competing interests with what ever you do, so choose what will get you the most miles and let the rest fall where it will.

  7. Good advice! People’s lives and finances are so complicated, that there is no one path that is good for everyone. People need to do what is best in their own situations.

  8. Julio says:

    Dilbert69,

    You are right in that you should pay off dept before working on a fully funded emergency fund of 3-6 months expenses. But the school of thought is to have a small ‘starter’ emergency fund of at least $1000 before you work on paying off dept to keep you from accumulating more dept each time something comes up.

    • dilbert69 says:

      Julio,

      Perhaps you’re right. But 16% interest on $1,000 is still $160/year. I’d rather be debt free and have not a penny to my name, but your compromise is not unreasonable. The people who have five figures in debt and a comparable amount in savings are the ones at whom I shake my head in wonder.

      • jillianlou says:

        I’m a math person too, so I hear you. But like Jim says, it’s all about doing what works for you! If having to put an emergency on a credit card ends up derailing your whole get out of debt plan because you get encouraged by the increase, having the emergency fund would have been worth it.


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