CONGRATULATIONS!
You paid off your credit card!
You might be wondering what to do with your credit card now that it's paid off. Do you leave the card open or should you close it?
Let’s look at the pros and cons of closing your paid-off credit card.
THE PROS OF CLOSING YOUR CREDIT CARD
Honestly, there are only two benefits of closing your credit card after you pay it off.
TO AVOID TEMPTATION
The main reason why many people close their credit cards is to avoid temptation. If you are not able to use the credit card it helps you to reduce the possibility of future debt. If you are not able to control your spending habits, your best choice may be to close some of your credit cards as you pay them off.
TO REDUCE FEES
If your credit card is charging you annual fees, you might want to close it. If you do not plan on using the card, canceling the card will save you those fees every year. Some credit cards charge you an inactivity fee, which means you are paying the company for not using it.
THE CONS OF CLOSING YOUR CREDIT CARD
Many people think that closing your credit card will increase your credit score. In actuality, closing your credit card, even when it has a zero balance, will hurt your credit score.
CREDIT UTILIZATION
Your credit utilization is the amount of your credit card balance compared to the credit limit. Your utilization essentially measures the percentage of your available credit that you are using, and it makes up about 30% of your credit score.
When it comes to your credit score, you want to keep your utilization low. If it is high, this indicates that you are spending a lot of your monthly income on debt payments which can put you at a higher risk of not making your payments. If you decide to close an unused card, you are reducing your available credit without decreasing your credit usage.
CREDIT HISTORY
Closing your credit card will not erase the card's history from your credit report. It also will not keep the history from being included in your credit score calculation.
Negative information remains on your credit report for at least seven years from the date it occurred. Your positive information, however, can fall off sooner than that if the card stops reporting it. If you keep the card open, that positive information will stay on your credit report and will help your credit score indefinitely. This also helps your payment history and your length of credit.
Remember, old credit is the best credit. The age of a credit card account is also essential when it comes to your credit score. The longer your credit history, the more accurate lenders can be in determining the level of risk they take on when loaning you money.
We all have a very special credit history. So closing an older account can negatively impact one person and not make much difference for someone else. For example, if you are 25 and have a short credit history, closing a credit card could hurt your overall score more than someone who is 60 and has a much longer credit history.
Closing a credit card account can hurt you if you are attempting to get a mortgage. Before you do anything, it's important to ask yourself if you're going to be making a major financial move in the short term. You eventually want to get to the place where your credit cards are paid in full every month. Paying off your credit card debt is very liberating and it frees up your budget. However, if you are having a hard time paying the minimum payments on your credit cards, you will need a solid plan to help you reach your goal.
I hope this helps you during these uncertain times. If you need more guidance, watch these videos to help get your credit in order