Tiffany “The Budgetnista” is back with some fun financial tips on figuring out whether to keep or close credit cards. She is super fabulous and 1/5 of my brown girl collective The Frugal Fab 5. Check out her site: www.thebudgetnista.com.

“Hey B, should I keep my credit card?”

“Tiffany, I heard that it’s bad to close a credit card, is that true?”

“Budgetnista, will closing my credit card lower my credit score?”

Well, I’m here to answer your money questions and…..it depends.

Here’s a step-by-step guide to help you figure out if YOU should close or keep your credit card(s).

1) List ALL of your Revolving Credit Accounts. These are accounts that allow you to continue to use them while paying them back. Some examples are: credit cards, home equity lines of credit (basically when you borrow from the mortgage money you have built into your home), retail (department store, gas) cards.

Unlike a loan, a revolving account doesn’t automatically close when the account reaches a $0 balance. It usually remains open and available for use until the lender or the consumer (you), chooses to close it.

2) Add up your credit limits. This is the amount the credit card company has said you can spend up to.

3) Add up your current balances. Your balance is what you currently have left to pay off of each card.

4) Divide your balance by your credit limit.   (example: if your balances equal up to $2,300 and your credit limits equal up to $10,000, then it $2,300/$10,000 = 0.23)

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5) Multiply your answer by 100 (example .23 x 100= 23 = 23%). This number is your credit utilization rate. Credit utilization tells you how much of your available credit you use on a monthly basis. The key is to use some of your credit, but not too much. Ideally you want to be using between 20% – 30%. You get graded for how much credit you use by the credit scoring companies. About 1/3 of your credit score is your credit utilization rate. If you’re paying all of your bills on time, but your score won’t seem to improve, your credit utilization rate maybe over 30%.

6) If your current credit utilization ratio is between 20% – 30% or higher, then you SHOULD NOT close any of your credit card accounts. Doing so will make your credit card utilization rate even higher and your credit score lower. Continue to pay down your cards and try your best to stop using them until you get your utilization rate down (if it’s above 30%)

7) If your ratio is below 20%, recalculate your ratio, but do so without your newest card. Length of credit history accounts for 15% of your credit score. You don’t want to shorten your credit history and lower your score by closing an old card. So redo your math without factoring in your newbie card. What’s your credit utilization score now? If it’s still between 20% – 30%, you’re good. You can close that new card. If your utilization ration is not between 20% – 30% without your newbie card, you need to keep it.

8) Keep dropping the newest card on your list until your find how many cards you can keep and still have a credit utilization rate between 20% – 30%.

9) Keep paying off your debt

10) Do a happy-dance, you FINALLY know how to decide if a credit card should stay or go.

Choose one…. 

About the author: Tiffany “The Budgetnista” Aliche is a speaker and a passionate, award winning teacher of fun, financial empowerment. She is also the best selling author of the book, The One Week Budget (#1 Amazon / budgeting). Her company, The Budgetnista, specializes in the delivery of financial literacy education.

Tiffany is the financial literacy expert for City National Bank, and she and her financial advice have been featured on the TODAY show, Pix11 Morning News, News 12 New Jersey, ESSENCE Magazine, FORBES.com, The Star Ledger, Ebony Magazine, FoxBusiness.com, MSNBC.com, Redbook, CBS MoneyWatch.com, Black Enterprise, USA TODAY, VIBE.com, as well as numerous online publications. She also blogs about personal finance, for The Huffington Post.