After 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 )