Comments on: What Order Should I Pay Off My Debt?

By: Java Monster

Java Monster — Fri, 12 Jun 2009 17:23:37 +0000

Nope, you can close it, but you’ll still have to pay it off.

By the way, it’s true about closing a card before you go for a loan–we did that with my husband’s card and another card, and ended up paying for it with a higher interest rate when we refi’ed our house. Bad move. But it might have six of one, half dozen of another: the high credit ratio may also have been a bad thing. We simply had too much in proportion to our income at that time.

By: big_bood

big_bood — Wed, 10 Jun 2009 12:50:23 +0000

I thought credit card companies would not let you close the account until the balance was zero.

By: Frugal Dad

Frugal Dad — Wed, 10 Jun 2009 12:44:36 +0000

@Vivian: One of the primary components of your FICO score is your credit utilization ratio – the amount of debt you have versus the total amount of your credit limits. Imagine a $3k balance on a $10k credit card – your credit utilization would be 30%, near the high end of what’s considered “good” in FICO score modeling.

If you pay off that credit card, but still have other debts, then the $10k limit is still being counted as part of our available credit lines and helping to reduce your credit utilization ratio. If you close that account, and the $10k is no longer counted, it could drastically increase utilization and hurt your score.

Bottom line, if you aren’t planning to borrow more money, who cares? Pay off the card, close the account and enjoy life without the hassles of a credit card. However, if you plan a major purchase, such as a home, in the next few months, it may be wise to leave things opened to help your score until the financing for that purchase is behind you.

Thanks for your question!

By: Vivian Love

Vivian Love — Wed, 10 Jun 2009 02:25:57 +0000

Just read an article about credit card on Yahoo- totally counter-intuitive. It says you shouldn’t cancel the credit card once you pay off the card because then it will reduce your credit limit and somehow count toward your FICO score. Care to elaborate on this?

By: JerryB

JerryB — Wed, 10 Jun 2009 01:01:14 +0000

Paying off debts is an emotional roller coaster. Like the Debt Tsunami suggests, pay off the ones with the highest emotional baggage first. If they all hold the same level of emotion then start with the highest interest/fees. Don’t forget to build a small emergency fund as well.
I would also wrap the Credit Cards in a piece of paper on which is written, “Last month I gave Visa (Mastercard/AMX) $xxx of my hard earned money!” The $xxx is the amount of interest you paid them. This will help you fight that urge to splurge. Yes, I know it’s on sale. Yes, I know it’s absolutely darling. No, I cannot afford it.