Paying off particular cards may benefit a credit score

Paying off particular cards may benefit a credit score

A low ratio means that cardholders have made efforts to keep their debt under control and may represent their overall financial responsibility.

Financial experts recommend that consumers use no more than 30 percent of the credit available over their various accounts. Therefore, it may make sense to dedicate one's funds toward keeping credit card balances well below their limits.

But choosing which accounts to pay off first may be difficult for consumers with multiple credit cards. A recent report by MarketWatch offered advice on making this decision, particularly if one or two of the accounts under consideration have been closed.

Quickly eliminating debt on closed cards may seem like an obvious way to go. Those who take this approach will never have to think about these accounts again - until they trim points off a credit score.

"Paying off the closed accounts is probably the worst thing to do," the report said.

Credit score damage is incurred because closed accounts no longer contribute to a debt utilization ratio after they are paid off. Therefore, having balances well below the limit on these accounts is actually more helpful than paying them off altogether. Rather, it may be better to focus on the credit cards that are still open.

Loans with low credit limits may be a reasonable target. These accounts contribute less to the overall credit a consumer has access to and can be substantially more harmful if their balances build up. Paying off cards with the highest interest rates can also be a cost-effective way to eliminate debt.

In addition to an individual's debt utilization ratio, the kinds and age of their loans also contribute to their credit score. Payment history, however, is more influential than any other factor. Falling behind on one payment will remain on consumers' credit reports for seven years, while larger violations can make it difficult to take out loans for up to 10 years.

Therefore, it is important for consumers to keep up on their bills in addition to maintaining a low debt utilization ratio. FICO, the company responsible for calculating commonly-used credit scores, recommends that consumers open more than one credit card account, but not so many that they become unmanageable.

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