Should You Close Your Paid-Off Credit Card?

For many people, paying off a credit card that has carried a balance for a while is a significant milestone on their financial journey. And it’s no question why, as the average American has $5,653 in credit card debt, according to a TransUnion study.

Once your credit card is paid off, it can still be useful, but it’s also brought a lot of financial stress into your life. Should you cancel your paid off credit card?

[ More: The Best Credit Cards of 2020 ]

One consideration that you should toss out immediately is whether you need to keep it around as an emergency fund. Credit cards actually make poor emergency funds; instead, you should aim to build a cash emergency fund over time in a savings account and not rely on a credit card to bail you out.

Here’s what you need to consider when closing or keeping your credit card

Credit card and identity theft

Simply having a credit card confers a small amount of identity theft risk. The Federal Trade Commission reports that $135 million was lost to credit card fraud in 2019. 

When your card is stolen, someone takes that number and uses it for undesired purchases and you’re left cleaning up the mess. Yes, the identity theft protections with most credit card issuers will resolve most of these problems, but it’s still a headache.

This is clearly a drawback of keeping the card, particularly if you don’t intend to use it going forward. Even though the risk of this is pretty small, dealing with the consequences of identity theft is time-consuming and frustrating.

The length of your credit history

A major point of consideration when it comes to whether to hold on to a credit card is the length of your credit history, which is a significant part in most methods for calculating a person’s credit score.

[ Read: The Simple Guide to Building Credit ]

With most credit score calculations, the longer your credit history, the better — up to seven years. Since your oldest card often determines the length of that history, you generally do not want to cancel your oldest card. If you do, it will slightly reduce your credit score for a while. However, if the card in question is not your oldest card, or if you have another card that’s more than seven years old, canceling it won’t impact the length of your credit history.

Your total credit limit across all cards

Another factor to consider when it comes to canceling a card is how it will affect your total credit limit across all of your cards. 

One significant component of your credit score is your credit utilization, which is the total of how much you owe on your cards divided by your total credit limit across all cards. So, if you owe $3,000 on a card but your total credit limit on all cards is $10,000, your credit utilization is 30%. In general, a lower percentage is better, though it is beneficial to be consistently using at least some of your credit cards while paying them off in full each month.

[ Related: Does Your Credit Card Cover Coronavirus Cancellations? ]

However, if you cancel a card that doesn’t have a balance on it, your credit utilization goes up. Let’s say you have a card with a $5,000 limit and nothing on it, and another card with a $5,000 limit and $3,000 on it. You currently have a 30% utilization. But if you cancel the card with nothing on it, your credit utilization is now 60%. It will have a negative impact on your score as long as your balance stays high.

If you’re carrying a significant balance on other cards, you may want to wait awhile to cancel any of your cards.

Spending temptation

For people who are struggling to reboot their spending habits, having a credit card with no balance on it can be a forceful temptation. It makes unnecessary spending incredibly easy, and it’s easy to forget credit card purchases until you’ve accumulated enough of a balance that you’re right back in your old situation.

If you’re really struggling to get your spending habits under control, canceling a credit card that is tempting you to spend beyond your means is a powerful step you can take to help rein in those temptations. It simply slams the door on those bad choices that seem fun at the moment but end up haunting you for a long time.

Unused credit card rewards

If your newly paid off credit card has outstanding rewards that need to be used, you should be asking yourself whether you want to continue using the card as your primary card to build more rewards. If nonessential spending on your credit card isn’t a temptation and the card has a good rewards program, then make it your primary card for most uses and just pay it off every month.

[ Read more: The Best Rewards Credit Cards of 2020 ]

However, if you have rewards on there but you’re not really going to want to use the card going forward, use those rewards up sooner rather than later. That way, existing rewards don’t cloud your judgment when it comes to deciding whether to close the card or not.

Future credit use

Do you have any upcoming situations in your life that will require the use of your credit score? For example, do you anticipate taking out a mortgage, refinancing your home loan or buying a car? Are you going to sign a new apartment lease? Are you going to actively search for a new job? Those things will involve businesses checking out your credit report.

If those things don’t really apply to you, then the impact of whatever you choose regarding the card will have minimal real-world impact on you. However, if any of those things are on the immediate horizon, there’s likely additional value in hanging onto that card for the time being.

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