Should I Close a Credit Card Once My Debt Is Paid Off or Keep It Open?

You've worked hard to pay your credit card off to reduce your debt; now, you wonder if you should close the credit card or leave it open. The answer to this quandary will depend on the specifics of your financial situation. Here are a few things to consider in order to help you make your decision:

1. It's Typically Better for Your Credit to Keep Credit Cards Open

If you're concerned about keeping your credit score as high as possible, it's usually better to leave your paid-off credit cards open. When you close your paid-off credit card, you're decreasing your amount of available credit, which impacts your debt utilization ratio. If it appears your credit cards are maxed out or you're using most of your available credit, this dings your credit score. For example, assume you pay off a credit card with a $10,000 credit limit. You still have a $6,000 balance on another card with a $7,500 limit.

By keeping the card open, you're only using 34.2 percent of your available credit. However, if you close the card, your debt utilization ratio will increase to 80 percent. This will likely cause your credit score to drop. The age of your debt accounts also impacts your credit score. If the credit card is one you've had for years and you close it, you'll also see your credit score dinged.

2. Some Individuals Need to Close Cards to Manage Their Use of Debt

Every person handles debt differently. If you know you'll be tempted to grab your credit card when you're short on cash, it might be better to close it to remove this temptation. Some people are fine cutting up the card or even freezing it so they only use it in emergencies. Should you find yourself reaching for the card when it's not a true emergency, cancelling it may be best for your finances.

3. The Impact to Your Credit Depends on Your Credit History

If you have a strong credit score with a mix of different accounts, a low debt utilization ratio, and a steady payment history, closing one card shouldn't impact your long-term credit score. You have an established history that will quickly rebound. However, if you have a low credit score, closing the card will hurt your score even more.

Should you decide you want to close the card, avoid doing so right before you're going to apply for a loan. Wait until you've applied for and closed on the loan, then, close the card. Over time, the impact of closing the card will lessen.

Let CCCU Help You Manage Your Debt

Clark County Credit Union offers free financial resources to help you learn about and manage debt. Check out Banzai to utilize these no-cost financial tools or contact us at 702-228-2228 to learn how you can open a credit card.