Credit card question: I’ve recently paid off credit card debt. Is there any reason I shouldn’t close the account?
Answer: This is a question I’ve gotten a lot recently. I’ve heard from people who paid off their credit card debt over time. I’ve also heard from people who paid the debt off after receiving an inheritance.
However you made it happen, I applaud you. It’s a truly liberating feeling to get that monkey off your back. But before you rush into closing the account because you’ve paid it off, take a minute to consider a few factors.
In general, it’s best to leave the account open and here’s why. Your credit score is made up of several components. One of those factors is the utilization ratio. This is the amount of debt you have compared to your available credit — the total of your credit limits across all of your credit cards. If you close your credit card account, the total amount of available credit gets smaller. This, in turn, can increase your ratio. The higher the ratio, the lower your score will likely be.
If this is a card you no longer want to use, just put it in a drawer and bring it out occasionally for a small purchase so your issuer doesn’t close the account from inactivity. A convenient way to do this is to use the card for a recurring expense, such as gym membership or subscriptions.
Another issue to consider is if you’re planning to apply for a mortgage or a personal loan any time soon. If you’re determined to close your account, wait until you’ve been approved for credit so your score is as high as possible during the application process.
But if this is an issue of self control, then you’re wise to consider closing the account. There are situations where the optimal advice doesn’t apply. It’s much better to close the account and take a hit on your credit score than it is to risk getting yourself in debt again. Admitting this isn’t a sign of weakness, by the way. It’s a sign of strength that you can recognize a personal issue and deal with it.
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Image: Wonderlane, via Flickr