Should You Cancel Your Credit Card After You Pay it Off?
There are many reasons you may or may not want to cancel your credit card and there are many things to consider before doing so.
Credit cards can be a great tool for personal finances but can also be a double edge sword.
Having a credit card can allow you a little breathing space with your finances or give you rewards for your purchases! Main thing is to keep on top of the credit, don't go into more debt than you can service and get more rewards than you are paying for.
Once you have paid off your credit card, you may wish to cancel the account and cut that credit card in half! It's a great feeling being debt free but there are some things to remember before you cut up all or one of your cards.
When cancelling an account and cutting the credit card in half this can then affect your utilization rate which in turn could have a negative affect on your score.
Your Credit utilization ratio or balance to limit ratio is one of the most important factors when it comes to your credit score. Typically it's ideal to have a balance to limit ratio of 10% or less. This means if you have a £1000 limit on your total balance, you should aim to keep the balance less than £100.
For example of how closing an account down we can have the following.
Total credit limit: £1000
Total accounts: 2 (£500 limit each)
Total balance: £100
Following this example you have a current balance of £100 with a credit limit of £1000, this means you then have a balance-to-limit ratio of 10%.
Now if you have that balance on one card and you decide to close one account, you are then left with a credit limit of £500 and a balance of £100. This will result in a balance-to-limit ratio of 20%, double that of the ratio which is normally desired.
A reason why you may wish to cancel your now cleared off & unused credit card is to avoid paying fees! For instance if you have several credit card accounts and the one you paid off has an annual fee, it then makes financial sense to close the account.
If you have had trouble in the past with credit card debt, closing the account or two could help you avoid the temptation to overspend again.
Closing your credit card account can affect your credit score. Though this isn't a long term effect but is something to take note of. If you are planning to apply for credit in the short term (6 months) it's most probably better to not close or open any new accounts as doing so could affect your credit score. Companies normally like to see a stable credit history.
On the other hand if you have more than one card and you know you won't be applying any time soon, the temporary decrease in score may not be a big concern.
If you want to check out your credit score and see what is affecting you, there are 3 main credit rating agencies:
*Sensible Investors/I have no affiliate with these companies