Is there anything more satisfying than paying off a credit card? With double-digit interest rates that can send even the smallest of balances soaring, the effort to pay it off can be arduous. When you finally manage to do it, though, you may be tempted to close the card forever. Here are some things to consider before you do.
One thing to consider before closing that credit card
A credit card without a monthly balance isn’t just good because it no longer costs you money in interest every month — it’s also be good for your credit scores.
One of the most important factors for your credit scores is something called “credit utilization.” Also called the credit utilization ratio or rate, it refers to the total amount of your revolving credit accounts that you’re using. It doesn’t include accounts like home loans, car loans, or student loans.
It’s easy to calculate your credit utilization ratio. Just add up all your revolving credit balances and divide that amount by the sum of your credit limits for these accounts. Multiply the result by 100, and that’s your credit utilization ratio. Experts often say it’s best to keep your credit utilization below 30 percent, but the lower it is, the better for your credit scores.
This is where your paid off credit card comes into play. If you close the card, then that available credit can’t be added into your total credit limit. So, even though you no longer have a balance ticking your ratio up, you also no longer have the higher available credit ticking your ratio down.
If you keep that credit card open and your balance low, your overall credit utilization ratio improves – and so should your credit scores.
How to make sure the card helps you and doesn’t hurt you
There is, of course, a danger in keeping the credit card open — it might be too easy to run up a balance again. Ultimately, the risk of accruing more credit card debt might not be worth keeping the card open to improve your credit scores. That said, there are things you can do to prevent yourself from getting into debt again.
Some people opt to cut up their paid off credit card so they can’t use it. Others literally freeze the card in a block of ice or hide it in a lock box. These measures can be helpful, but keep in mind that credit card companies can close a card for lack of use.
There are ways to use a card enough to keep the bank from closing it, but not enough to go into debt. For example, you could set up automatic bill pay for one bill each month (like a telephone bill), and then set up an automatic payment to go to the card from your bank account for the same day. That way you’re using the card without running up your balance or being charged interest.
Some people keep their credit cards open and use them for things they might not feel safe using debit cards for. You might prefer using a credit card when shopping online, for example. In that case, you can prevent running up your balance by making a payment to your credit card as soon as you make a purchase on it. That way you can be sure you won’t forget later or be tempted to keep a balance going until your budget feels more comfortable.
While you’re at it, you can follow these steps to make sure your card is protected against identity theft, and these steps if your card or card number is stolen.
Your comfort level is important to consider
Ultimately, it’s up to you to decide on your comfort level with credit cards. If you decide having one at all will be too risky, then you needn’t put yourself in an uncomfortable position to improve your credit scores. But if you can find a trick that helps you keep the card open without tempting you, then your credit can benefit for it.