Notes

Let’s say you have 2 credit cards and each has a credit limit of $1,000. If you owe $500 on one card and $0 on the other, your utilization would be $500 divided by $2,000, or 25%. That’s a good ratio. You should always try to keep your credit utilization below 25% to 30%.

You’re penalized for having a high utilization ratio because it’s a red flag to creditors. They figure if you can’t pay down your balances you must be spending too much and are a high credit risk.

How Does Canceling a Credit Card Damage Your Credit?
Consider what would happen if you cancel a credit card because you’re not using it or you finally pay it off. Let’s use my same example and say you close the card with a $0 balance that has a $1,000 credit limit.

Now, your utilization ratio is totally different because your available credit limit has been reduced by $1,000. The revised math is $500 divided by $1,000, or 50%, which is too high. Even though you have the same amount of debt, your utilization ratio makes you appear less credit-worthy because it’s a larger percentage of your available credit limit, and your credit scores will go down.