Should I Cancel a Credit Card That is Paid-Off?

You’ve finally paid off that credit card. It’s sitting there with no balance on it and you regret ever owning it. It’s got a high interest rate and no rewards program and you will never use it again.

But should you close it? This is an interesting debate that often comes up in personal finance circles. I think there are benefits and drawbacks no matter which you choose and the “best” answer isn’t absolute in all cases.

So let’s dig in.

If you keep the card…
If you decide to keep the card, there are a few things you should think about.

First, simply having the card is a small identity theft risk. If you’re no longer actively using the card, the risk is pretty small, and you can make the risk even smaller by taking action.

Second, if you don’t cancel the credit card it opens the door to spending temptation. Obviously, if you have the strength of character to pay off all of that debt, you’re able to keep the temptation in check.

There are two big steps you can take to reduce the two risks above even more, chopping them down to an incredibly tiny sliver.

For one, destroy the physical card. Cut it up so that there’s no risk of losing it or having it stolen. I tend to actually melt used credit cards over an open fire (seriously – I’ll toss them into campfires).

For another, remove your credit card information from any online retailers that may still have it. Check your Amazon account or any other retailers you might use and make sure your zero balance card isn’t listed there. Just get the information completely out of the system.

If you cancel the card…
Let’s say you decide to cancel the credit card. What are the drawbacks of canceling it?

The big one is that canceling a credit card results in a negative bump on your credit score. This negative bump goes away after roughly a year, but during that year, your lower credit score can have some short-term negative implications. It can cause your insurance rates to go up. It can reduce your chances for getting work.

The big one, though, is that it can also hurt you if you’re attempting to get a mortgage. A lower credit rating right at the time when you’re attempting to secure a home mortgage is not a good choice.

So what should I do?
From my perspective, the answer is simple. Before you do anything, ask yourself if you’re going to be changing jobs or getting a mortgage or a car loan in the next year.

If you’re looking forward to a major move like this in the short term, don’t cancel the card. The risk of the short term drop in your credit rating is higher than the risk of just cutting up the card and forgetting about it.

Instead, cut up the card, but hold onto the account until you’re past that hump that you’re facing in the short term. When you’ve made it, then make the call and cancel that credit card.

On the other hand, if you don’t see a major move in your future, cancel that card. Doing so eliminates the temptation and eliminates the (small) chance of identity theft.

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