For most of us, our credit score is one of the most important aspects of our financial picture. It affects the amount and rate available to us on mortgages, auto loans, and many other types of financing. Keeping this in mind, we get a plethora of questions about credit scores and how to improve them. One of the questions we receive most often is, “should I leave my paid off credit lines open or closed?” The answer to this question has a number of different factors you need to take into consideration.
In order to figure out whether or not to close your credit line you must first know the components of a credit score. There are three primary factors in determining credit score:
- number of credit lines open,
- percentage of total available credit that has been drawn, and
- length of credit history.
If you choose to leave a paid off line of credit open this will hurt the first factor and help the second. Whether it impacts the 3rd factor (length of credit history) depends on whether it is the first line of credit you opened. If it is the first line, it may be more harm to your credit score than beneficial to close it.
Keeping these factors in mind, we believe it would be best to keep paid off lines with large credit lines open, since these will significantly help the second factor; and to close paid off lines with small credit limits. However, if you believe that keeping the large credit lines open and available will cause a behavioral risk for you to use them and be tempted to accrue unnecessary debt because of its availability we could recommend you close all paid off lines of credit you do not plan to use in the future.
If you have more questions about your individual credit score or financial picture please do not hesitate to reach out.
Your Fortis Capital Management Team