Is increasing your credit score on your list of goals? If so, you may immediately think cutting up your cards and closing your accounts is the first step on the road to a higher score. But before you pick up the phone, it’s important to understand the ramifications of closing accounts on your credit score.

Many people think that when they cut up a card the account is closed. However, you have to actually contact the credit card company to close out the account. If you are concerned about continuing to use the card, then cutting up the card to prevent usage while paying off the balance can be an effective strategy.

The reason closing accounts can impact your credit score is that a large portion of your credit score is calculated based on your debt-to-available credit, or credit utilization percentage.

Most experts say 30 percent is a good debt-to-credit threshold, and the lower the better.

For example, you have the following credit cards:

• Card with $5,000 limit and $2,500 balance

• Card with $7,000 limit and no balance

You have a 20.8 percent credit utilization, which is within the target range.  However, if you close the account with the $7,000 limit, then your credit utilization score changes to 50 percent, which above what experts recommend. Instead of having the intended effect of increasing your score, you may very likely cause your credit score to be lowered.

The Smart Way to Close Credit Cards

When considering closing accounts, use the following tips to potentially lessen the impact on your credit score:

• Calculate your credit utilization percentages and carefully think through the impact of closing specific cards on your debt-to-available credit ratio. Determine which card makes the most sense to close based on the impact on your credit utilization score.

• Consider paying off the credit cards you are going to keep open before cancelling any cards. This may lessen the impact on your credit utilization score.

• After each card is paid off, check your credit report to ensure that the zero balance has been reported to the credit bureaus, which will also reduce the impact.

• If you decide to close an account, contact the credit card company and follow procedures for closing the account. Different banks have different procedures ranging from completing a form to simply making a verbal request over the phone.

Increasing your credit score can take time and effort. By making sure you are not inadvertently making financial moves that cause a step back in the process, you can continue on the road to a healthy financial future.