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The Vanishing Credit Score

The Downside of Paying Off Debt

Paying off debt is one of the most common financial goals. The advantages of becoming debt free are clear. However, experts advise caution when paying off debt or closing credit cards, as it may impact your ability to obtain future credit.

Individuals who diligently pay off their debts generally assume it will reflect positively on their credit score. In certain situations, paying off debt may trigger a transition from a good credit score to no credit score.

"While it's commendable to pay off debts and streamline your financial life, it's essential to strike a balance between paying off debts and maintaining a healthy credit profile,” explained Marcene Carstensen, Mortgage Lender for Union State Bank. “Simply eliminating all debt may inadvertently erase your credit history, leaving lenders with no basis to assess your creditworthiness."

While it may seem logical to close unused credit cards, doing so can impact credit utilization ratios and reduce the overall length of credit history, both of which are important factors in determining creditworthiness. Financial experts advise consumers to carefully evaluate the implications before closing credit accounts.

"Closing credit cards can have a dual effect on your credit score. First, it reduces your available credit, which can increase your credit utilization ratio if you have existing balances on other cards. Second, closing an older credit card decreases the average age of your credit accounts, potentially diminishing the positive impact of a longer credit history. It's important to weigh these factors and consider alternatives before closing credit cards,” Carstensen said.

To mitigate the unintended consequences of transitioning from a good credit score to no credit score, Union State Bank recommends several strategies:

  • Maintain a small balance: Keeping a small balance on one or two credit cards and making timely payments can help establish and maintain a credit history.
  • Monitor credit utilization: Aim to keep credit utilization below 30% of the available credit limit on each card to demonstrate responsible credit management.
  • Consider alternatives to closing credit cards: If you wish to reduce your credit card portfolio, explore options such as downgrading to a no-annual-fee card or using the card periodically for small purchases to keep it active.

As consumers strive for financial stability and success, understanding the potential risks associated with managing credit is crucial. By staying informed and implementing smart credit management strategies, individuals can maintain a healthy credit profile. Union State Bank provides additional information regarding financial fitness on their website, www.MyUnionState.Bank.

About Union State Bank: Founded in 1908, Union State Bank has banking locations serving communities of Arkansas City, Newton, Udall, Winfield, and Wichita in Kansas and in Bartlesville and Edmond, Oklahoma. Union State Bank offers a full range of electronic, deposit and cash management services, as well as business and agriculture, commercial real estate, construction, mortgage, residential and consumer loans. Member FDIC. Equal Housing Lender, NMLS# 412388.

Disclaimer: The advice provided in this article is for informational purposes only. It is recommended that individuals consult with financial professionals for personalized guidance on credit management.