If you've worked hard at paying down your credit card balance and finally have it paid off, it's time to decide what you will do with your paid-off credit card. There's a valid case for both options of keeping the account open and closing the account.
The Big Debate
Should you keep them open or close them? Which is the better option for your personal finances? Which is the best for your credit rating? Some situations warrant keeping your credit card accounts open, while other times it can be better to close the account.
According to MSN, there are circumstances when closing a credit card account can benefit you financially. If you and your spouse are divorcing, you are giving up using credit or you have to pay annual or other fees to have the card, then it can make sense to close the account.
Avoid Incurring More Debt
Financial expert Dave Ramsey says there are no good reasons to keep a credit card open. Ramsey says that people tend to charge up their credit cards, which can lead to debt. He says responsibly managing your finances is easier to do without a credit card balance lurking in your finances.
If you are the type of person that tends to charge up credit cards, then you are better off closing your paid-off credit card accounts. You can even opt to close credit card accounts that do not have paid-off balances to avoid charging any additional purchases, but read the terms and conditions of the card beforehand because some companies will increase the interest rate on the remaining balance until the account is paid in full if you go this route.
Keep It Open
Financial gurus, such as Suze Orman, say closing a credit card can have adverse effects on your credit rating. Keeping the accounts that do not charge annual fees open can boost your credit score because a percentage of your credit score calculation is your available credit ratio compared to your utilized credit. Debt ratio, which is the amount you have as an outstanding balance versus how much in total credit lines you have, can increase if you close a paid-off credit card. A higher debt ratio makes you a higher risk.
For individuals without cash savings or easy access to cash, a credit card with an available balance can be a source of emergency cash. This is a plus for keeping the credit card account open, even if you don't have intentions to use it.
If you want to maintain or increase your credit score, it is better to keep the credit card account open. A large consideration for your credit score is making timely payments. Using your credit cards and paying them off on time each month is a way to boost or maintain a high credit score.
Using Paid-Off Cards
If you decide to keep the card open, whether for use in an emergency or as a way to maintain your credit score, don't fall into the habit of using the card for impulse buys. Instead, be intentional with how you use the card.
Use one or more of your paid-off credit cards occasionally to make purchases. Only pay what you can afford to pay off each month. When the bill comes in, pay your balance in full. This keeps the card from falling into inactive status, allowing the account to still have a positive effect on your credit score.
Pay Bills Automatically
Use the card to automatically pay recurring monthly bills, such as the utility companies, cable company, gym and daycare services. When the statement comes, pay off the balance each month in order to avoid paying interest on your purchases.
Automatically paying bills with your credit card helps to ensure that you pay your bills on time while also allowing you to utilize the credit card. According to FICO, making payments on time is one of the biggest factors in computing your credit score.
Cards that allow you to earn points on your purchases also allow you to cash in those points to pay for products and services. It is possible to receive a free plane ticket or gift cards to a favorite retailer by earning points on purchases you had to make or bills you had to pay anyway.
While there are circumstances when it can be wise to close a credit card, when you choose to keep the account open, it is imperative to use the cards responsibly. Only charge what you can afford to pay off at the end of the month or as quickly as possible to avoid or limit the amount you pay in interest. Keeping the account active can help to maintain or boost your credit score, but closing the card means you aren't tempted to use it for impulse purchases. Decide which option is best for your personal financial situation.