Can Canceling Credit Cards Help My Debt Ratio?

Your instincts might tell you that it's best to close a credit card after you've paid it off. However, if you're concerned about your debt-to-credit ratio, it's actually better to leave unused accounts open. Credit scoring companies don't care whether your accounts are active or inactive. Even if your lender eventually closes your card due to inactivity, this won't hurt your score any more than if you'd closed it yourself --- and in the meantime, leaving it open could actually boost your debt ratio and credit score.

Debt Ratio

Your debt ratio, called "utilization" where credit reports are concerned, is a percentage that signifies how much total debt you have in relation to total available credit. For example, if you have only one line of credit with a limit of $1,000 and a balance (debt) of $200, your debt ratio is 20 percent. If you have multiple accounts all of your debts are lumped together, and the same goes for your available credit.

Account Closure and Your Ratio

Closing a credit card account will never help your debt ratio. If you have an unused card with a high credit limit, once you close that card, your debt-to-credit ratio will go up. Even if your total amount of debt stays the same, closing an account decreases your amount of available credit, which tightens the gap between what you owe and your available credit. However, if you must close a credit card, choose the one with the lowest credit limit, because this will have the least impact on your score.

Leaving Accounts Open

In most cases, it is best on all aspects of your credit score to leave your credit card accounts open --- especially when it comes to your debt ratio. According to Bankrate, your credit utilization comprises 30 percent of your overall score. This means that, even if you have a variety of lines of credit and carry a long, positive credit history, a high debt-to-credit ratio could knock your score down into the lower percentile.

When Closing Makes Sense

Sometimes it makes sense to close a credit card. If the card requires a high annual fee or charges an unreasonable inactivity fee, you are better off nixing the card. If you have trouble controlling your spending, cutting all ties with a tempting card is the best option. If your account information has been stolen or you suspect unauthorized use of your card, it's definitely best to close the account. Although closure might shave a few points off your score, you will do your finances much more harm by leaving a stolen account open.