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A reader is in for a shocking answer.

Question: I have transferred all my credit card debt to a single no-interest card for 18 months. I have five other credit cards, and now all the other credit card companies are increasing the limits on the cards I just paid off. Which is better for my credit score: Cancel them? Hold onto them? Or charge a little and pay them off each month? I really don’t want to use them.

— Kim in Pennsylvania

Howard Dvorkin answers…

Here’s the short, cryptic answer: The best thing for your credit score might not be the best thing for you.

Money in a minute: What if your credit score was a pie?

If you picture your credit score in a pie, it’s divided into five slices. But each slide is not the same size.  The largest – a third of the entire size of the pie – is called payment history. That means, do you pay your bills on time? The next biggest slice is just another a third, it’s called credit utilization. That means how much of your available credit have you spent. As you can see, that’s more than two-thirds of the pie.  Three other slices are really small.

Length of credit history is only 15 percent. And at 10 percent each are credit mix and new credit. What’s this prove? Focus most on the two biggest slices and your credit score will be easy as pie.

Now the long answer…

How a credit score works

Your credit score is based on five factors. One of those is called “length of credit history,” and it comprises 15 percent of your score.

If those five still-open credit cards have been in your possession for years, then they’re actually boosting your credit score. Here’s the problem, though: You need to keep using them for that 15 percent to keep kicking in.

That means you need to make small charges every once in a while — and then pay them off in full. How often? Once a month to be safe, once a quarter on the outside.

Of course, if this poses too much temptation to once again run up your balances, the safe bet is to close those cards. After all, the biggest chunk of your credit score is called “payment history,” and at 35 percent, if you’re late on even a few payments, it’ll swamp that 15 percent you’re benefiting from.

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The second-biggest chunk of your credit score — at 30 percent — is called credit utilization. That’s the fancy way of saying, “How much you owe compared to how much you can borrow.” In other words, if you have $10,000 of available credit on five credit cards, and you’re almost maxed on them, your credit score will suffer mightily.

So as you can see, 65 percent of your credit score is determined by paying your bills on time, and keeping your balances low. That’s why it’s so hard to tell you if closing five mostly inactive credit cards is good or bad for you.

There’s one other factor of your credit score I even hesitate to mention, because it’s the most vague and one of the smallest slivers of the pie. It’s called credit mix, and it represents 10 percent of your score. In plain English, this means you have a variety of different credit lines.

Why is this important to lenders? It proves to them that you can pay back all different kinds of debt. In the case of these five credit cards, closing them would reduce the diversity of the debt you’re holding. So that’s another ding on the credit score.

If you’ve soldiered on through this long explanation, then you might see the wisdom in this advice…

  • Completely pay off the no-interest card within 18 months (or face sky-high interest rates).
  • Keep that card and 1-2 of the oldest cards you have.
  • Make small charges to each, and pay them off in full each month.
  • Close the other cards and don’t look back.

Within a few months, you should see your credit score creep up. Over many more months, if you keep paying off your cards each month, you’ll see it jump. Why? Because you’ll have a history of low balances paid on time, you’ll have a few very old cards, and you’ll be considered an excellent customer by lenders. You can’t beat that.

Want to know more? Check out Debt.com’s report, How to Improve Your Credit Score Step-by-Step.

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About the Author

Howard Dvorkin, CPA

Howard Dvorkin, CPA

I’m a certified public accountant who has authored two books on getting out of debt, Credit Hell and Power Up, and I am one of the personal finance experts for Debt.com. I have focused my professional endeavors in the consumer finance, technology, media and real estate industries creating not only Debt.com, but also Financial Apps and Start Fresh Today, among others. My personal finance advice has been included in countless articles, and has appeared in the New York Times, the Washington Post, Forbes and Entrepreneur as well as virtually every national and local newspaper in the country. Everyone should have a reason for living that’s bigger than themselves, and besides my family, mine is this: Teaching Americans how to live happily within their means. To me, money is not the root of all evil. Poor money management is. Money cannot buy happiness, but going into debt always buys misery. That’s why I launched Debt.com. I’m glad you’re here.

Published by Debt.com, LLC