Pay off all card debt? Or leave a small balance?

If you want to keep the card, use it; inactivity can cause it to be closed


Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Dear Credit Smart,
  Should I pay off all credit card debt or keep a small balance? Will a company close a credit account that is not used much? – Dwight


Dear Dwight,
It sounds to me like you are in the enviable position of not having much, if any, credit card debt. This is a good thing, and a position you should strive to keep.

Credit can sometimes be a tricky thing, though. If you use your credit card infrequently, you may run the risk of having the card closed by your lender. Your lender may see a period of inactivity and decide to close the account. That could, in turn, trigger a reduction in your credit score. This is due to the fact that part of your score is based on your available credit. If your card is closed, your available credit will be reduced. While on the surface that seems unfair, there is a very simple fix, which I will share with you.

Use your credit card at least once or twice every month for purchases that you have the cash on hand to pay for at the time. While this may seem counterintuitive since you have the cash available, what it will do is work in your favor in a couple of ways. First, it will increase the activity on your account. Because you do have the money to pay for your purchases, you will be able to pay your bill in full when it arrives. Paying your card off every month ensures that your available credit remains open. It also means that you won’t pay interest or get yourself into credit card debt, since you will be paying your balance in full every month.

One word of caution – once your creditor sees a pattern of use like this, they may very well increase your credit line. This is again a good move for your credit score, since it increases your available credit. But when a credit card company increases your credit line, they are giving you room to spend more. In fact, if you spend more than you can pay off right away they can charge interest on your purchases. But just because you have the available credit does not mean you have to use it all. In fact, if you use too much of your available credit and begin to carry a larger balance, your credit score will likely dip.

The credit scoring models like to see consumers use a low percentage of their available credit. For your own personal financial health, it is best to pay your balances in full every month as I have described and not carry a balance at all. Keep track of what you charge and don’t spend that money someplace else in the meantime. Remember, too, that you need to pay your bill on time, every time. Paying a day or two late will probably not cause your account to be reported late to the credit bureaus, but it will likely trigger a late charge. That defeats the whole purpose of using the cards in a responsible way without having to pay a premium, whether that premium comes in the form of interest charges or a late charge.

Remember to always use your credit smarts!

See related: 5 things to know before asking for a credit-line increase

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Published: April 9, 2016

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Updated: 10-22-2016

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