Many people believe if they pay off their credit card balances, there will be an automatic and dramatic increase in their credit score. Perhaps. If you ask five "credit professionals" about paying down your credit card balance, you'll get at least seven different answers.

When you pay off your balance, if you then choose to close your account this could be dangerous. Why? Because credit bureaus (those agencies that calculate your credit score based on your history) look at your available credit. So, let's say you have five credit cards, each with a $10,000 credit limit (for a total of $50,000) and the total of all five balances is $40,000. You decide to pay down the smallest balance because that'll make you feel as though you really accomplished something, and that is not far from the truth. At this point your credit availability is 20% ($50,000 total limit minus the $40,000 total balance results in an availability of $10,000, divided by the $50,000 total limit is 20%.)

The smallest balance is $2,000. You pay it off and close the credit card account. That means your total credit limit is now $40,000 in credit limits and you now have $38,000 in balances, for an availability of only 5%. (You can follow the math in the previous example.) Credit bureaus like you when you have availability of 75% or more.

But wait...there's more! Let's say instead you decide to keep the credit card open that you just paid down. Furthermore, let's say you find $7,000 in the sofa cushions and pay down another card and keep it open as well. Guess what? The credit bureau may see this and say, "I bet they're going to charge those credit cards back up again." So, they ding you for all this availability that you thought would be great.

Sometimes you really can't win for losing. It's always good to pay down debt. If you can pay off your credit cards, keep the accounts open, and from that point pay off the balances each month, you'll eventually see your credit score grow. Your score will indeed grow, it simply takes time.

What will be your first step to paying down your credit card balances?

CategoriesCredit & Debt