So You Paid Off Those Cards
If you have paid off your credit card debt, congratulations. This is no easy task, it took a lot of hard work and dedication. Surely you never want to get in that position again so cancelling those cards as soon as possible, seems like a great choice.
Well, maybe not. What you must realize is that closing a credit card can have a serious impact on your credit score. So, before you rush into closing that card or cards, take a minute and ask yourself a few questions.
1. How Old Is This Card?
One factor in your credit score is the age of your credit. A lengthy credit history shows that you have experience with managing credit and it will improve your score.
If the card that you intend to close is one of your older accounts, closing it could lower your average age of credit. This will almost surely result in a decrease in your credit score.
So, if that card is very old, consider hanging on to it.
2. How Much Is The Card Limit?
Another factor in your credit score is the amount of your credit that you are using. You want to show that you are responsible with credit by using less than 30 percent. It is called credit utilization and it makes up a huge part of your score.
Cancelling a credit card will lower the amount of available credit that you have available to you. This can raise your credit utilization ratio. Suppose that you have 10000 dollars in available credit with a balance of 3000 dollars. You are doing good with a utilization ratio of 30 percent.
Now, suppose you can cancel a credit card with a 2000 dollar limit. You now have only 8000 dollars in available credit but still are using 3000 dollars of that credit. Your utilization ratio now increases to 37.5 percent and your credit score will drop. Keeping that card but not using it would have prevented this.
So, if this is a high credit limit card, consider holding on to it.
3. Can The Fee Be Waived?
Many credit cards come with an annual fee. In these cases, it makes sense to get rid of the credit card, even if it would lower your credit score. There is no use paying to keep your score from dropping a few points.
What you might not realize though is that card companies really want to keep your business. Give them a call and explain to the representative that you want to cancel the card because of the annual fee. This will usually result in an offer appearing to waive that annual fee.
The only issue with this is that you will have to repeat this every year, most will not permanently waive the annual fee. Still, it may be worth doing if you think that losing the card would result in a credit score decrease.
So if you can get the annual fee waived on an otherwise good card, you may want to consider keeping it.
4. What Does Your Credit Mix Look Like?
Another credit score factor that is not talked about much is your credit mix. Lenders like to see a mix of different types of credit. Mortgages, student loans, installment loans and credit cards all play a part. Closing a credit card or multiple credit cards could disturb this balance.
This is one of those odd rating factors that confuses people. You hear all the time about people paying off their student loan debt, only to see their credit score drop. What seems like something that should be a positive, suddenly becomes a negative. This is the credit mix ratio at work.
So, if you think that closing a credit card might disturb your credit mix, you might consider hanging on to it.
5. Does The Card Have Useful Benefits?
Besides protecting your credit score, you may have other reasons to keep a credit card. Benefits might be one of them. If you are disciplined and pay your card off every month, you might just be able to take advantage of these benefits while not accumulating any new credit.
One of the most coveted of benefits is the airline mile. People love collecting airline miles, sometimes to a fault. Cash back offers are also nice as well and if you put some monthly bills on your card, you can take advantage of some pretty nice cash rebates.
Just be careful with these benefits, there is a reason that credit card companies offer them. They want you to use the card and build up a balance that carries over, so they can charge interest on it.
So, if you are disciplined and have a nice reward card, you might consider keeping it.
6. Could You Use The Safety Net?
Lastly, let’s look at the safety that having a high credit line credit card can give you. Sure, you should have an emergency savings account to account for sudden and surprise expenses but many do not.
Even if you do have a well funded savings account, if a card is not costing you anything to hold, it could be a nice extra cushion if the worst were to happen.
So, if you could use a bit more financial security, you might consider holding on to a credit card.
Pulling It All Together
Paying off your high interest credit card debt is a wonderful things. If you have reached the goal of being free of credit card debt, congratulations.
Credit cards should still remain a part of your credit plan however. Even if you plan to rarely if ever use them, it is, in most cases, a good idea to hold on to them. At least the oldest and highest limit ones.