One of the common financial goals many consumers have is to get rid of their credit card debt. This is a good goal to have, but it’s important not to take it too far.
The temptation, when you pay off a credit card, is to close the account. That way you aren’t tempted to charge more to the account. However, before you decide to close your credit card account, it makes sense to stop and think through the consequences. Sometimes, it just doesn’t make sense to get rid of your credit card.
Closing Your Card Account Impacts Your Credit Score
You should understand that closing your credit card account has a very real impact on your credit score. Closing an account can ding your score a little bit, but that’s not where the real impact comes in.
Instead, the more indirect consequences of closing your credit card account are likely to cause more problems with your credit score. There are two main issues that arise when you close a credit card after you pay it off:
Credit Utilization: The second-most important factor influencing your credit score is how much of your available credit you are using. When you pay off a credit card, all of a sudden you are using less of your available credit. This is good for your credit score. Unfortunately, if cancel that credit card right after paying it off, you lose all that positive impact. Now it looks as though you are using more of your available credit, since all you have left are cards that you haven’t paid off yet.
Credit History: To a lesser degree, your credit score is impacted by the length of your credit history. Having an open account contributes to the average length of your credit history. Once you close that account, though, the story changes and your history looks much shorter than it is.
Both of these issues, combined, can have a slightly bigger impact on your credit score that you might think. While closing your credit card account probably won’t destroy your credit rating, the reality is that it will have an impact, and you need to be aware of that.
Waiting to Close Your Accounts
Instead of closing a credit card account once you pay it off, consider waiting. You can freeze the card in a block of ice, or hide it away somewhere so that you don’t use it. Keeping the accounts open while you continue to pay down your debt can help you maintain your credit score. Once the debt is all paid off, you can evaluate which accounts to close, and which to keep open, considering the credit limit and how long you have had the account.