Q. My husband and I have been married for a year. Our only debt is my student loan and his car, which we pay on time. Credit card debt is almost always paid off monthly. We have several credit cards and we are wondering if we should pare it down (three Visas, two store cards, one Discover card). If we close an account or two, will we hurt our chances when we get a loan to replace my ailing car? Should we wait, throw the cards in the safe so we donít use them and close them after the car purchase?
A. When people put the word ďonlyĒ in front of any amount of debt, my Spider-Sense starts to tingle. You donít ďonlyĒ have student and auto debt. You have debt. Period. So Iím going to answer your last question first.
Yes, put all the credit cards away until you pay off the student loan or loans and your car loan. Then save the money you were applying to those debts for car repairs for your ailing car so that you can hold onto it until you can pay cash when you ďneedĒ to replace it.
Now, will closing an account hurt your credit score? It depends.
The credit-scoring algorithm looks at the credit utilization ratio for each active account and, separately, a personís credit usage for several accounts together. Basically, the ratio is determined by how much of your available credit you are using in relation to your total available credit.
The more of your credit line you are using, the more it can negatively impact your credit score. If you close a card, you eliminate some of your available credit and that can increase your credit utilization ratio, which again is not a good thing. So if you have debt outstanding on any of the cards, donít close any of the accounts until youíve paid off any and all credit cards.
If you donít have any outstanding debt on the cards, you can close them without it hurting your scores significantly. You might see a small drop in your score but it will rebound if you are paying any other debts on time. People are often concerned about closing accounts because they know the longer you have an account in good standing, the more positively it affects your credit store.
However, closing an account doesnít automatically mean it will be removed from your credit reports. The account can remain on your reports for years.
In this case, since you arenít carrying any credit card balances month to month, you could close the accounts you donít want to use. And really, how many cards do you need? You shouldnít charge more than you can pay off in a month, so there isnít a need for a lot of cards. Keep the cards with low or no annual fees or ones that offer perks you like.
Q. I would like to rebuild my credit by making affordable payments over a period of time. On average, how long does it take for your score to increase, taking into account a low debt/ratio balance with several cards? I can pay them off but think paying over time will bring the score up.
A. Itís true that paying a bill on time helps build up your credit score. But not having debt also impacts your credit score in a positive way.
So, if you have the money to pay off your debt in one lump sum, pay it off. First, you save on the interest. And getting rid of the debt will give your credit score a quicker boost than paying over time.
Your credit score is reflected by whatís in your credit report, which is a history of how you handle your debts. So if you want to rebuild your credit, you make your credit report look better. Paying off debt will immediately improve your credit history.
Michelle Singletary is a financial columnist for The Washington Post.MORE IN National / World Business
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