“Dear Steve,
We have received money from a settlement that was won. The money is enough to pay off all our debts, with the exception of student loans. We are paying off all our credit cards and car loans. Between me and my husband, we have 12 open credit accounts and 2 car payments. We have been very fortunate to be able to keep up with our payments, but barely. My challenge is, I would like to close these all but 2 of these credit accounts, but I don’t want to cause a negative impact on out credit score as we want to buy a house within the next year. Once the debts are paid, can we close these accounts without a negative impact on our credit score?
What, if any, impact would be on our credit score, if all debts are paid?
Rebecca”
Dear Rebecca,
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There is little benefit or score bump to paying off the debts unless your debt to income ratio os out of whack. You need to remember that the credit score is calculated to identify people that will keep their debt in check but maximize income for the creditors by carrying a balance and paying interest. People that pay off debts and don’t show a balance are deadbeats in the eyes of the creditors.
I applaud your desire to get out of debt but I’m wondering if part of this settlement check might be needed in the future? Does part of this need to be saved to provide you with a liquid savings account in case you need it for an issue related to the event which lead to the settlement?
What you should consider to minimize the impact on your credit report is to get a copy of your consolidated credit report. Follow the credit report link, it’s the one I use. This is a 3-in-1 bureau report and will show all the credit accounts reported about you. Identify the two or three major Visa, MasterCard, American Express or Discover accounts which have been open the longest and don’t close those. Those accounts are providing you with the longest and most heavily weighted credit history.
Store accounts don’t do anything to boost your score and if those are the oldest on your credit report, go ahead and close those and move up to the oldest major accounts to leave open.
