Most lenders use an automated credit scoring system to help determine your creditworthiness. The higher your credit score, the more credit-worthy you appear. One of the factors built into the scoring is your debt-to-credit-limit ratio (the amount of debt you owe compared to your total credit limit for all cards). Lenders like to see ratios indicating you're indebted for balances less than 30% of your total overall limit. Generally, if your debt-to-credit-limit ratio is higher than that, then reducing your debt will improve your credit score. But how you reduce your debt can make a difference.

Act Carefully
You may believe that you should consolidate several credit card balances on one card with a low interest rate, and then close the paid-off accounts. Don't. While it makes sense to transfer high-interest balances to accounts with lower rates, you should keep the paid-off accounts open in order to maintain the highest possible total available credit.

Protect Yourself
Many consumers want to close unused cards in order to reduce their exposure to identity theft through the fraudulent use of inactive open lines of credit. This is a valid concern; however, it should be weighed carefully against the negative effects of the credit scoring system. This is a tough choice--and affects every consumer differently. If you have a specific question, you should seek advice from a financial professional.

The Credit Report is a Different Story
Even though your credit score may be affected, it's important to note that paying off a delinquent or collections account will not necessarily remove the negative information from your credit report. You still have to go through the necessary credit repair steps in order to correct your file.