Once you have paid off your credit card, the next logical step would be to close the account, right? This may make sense, as you're done using the account. But even if this card was the first one you ever got or a newer one, you will be hurting your credit score by closing it abruptly. Keeping the account you have successfully paid off can actually help your score improve. Here are a few things you should know about canceling a credit card:
Raise your credit-utilization ratio
Your credit-utilization ratio is how much of your credit limit you're using. For instance, if you have an overall limit of $5,000 and your balance is $1,500, your ratio would be 30 percent. If you close the account, you would negate your payment success rate by raising this ratio.
Lower average age of accounts
The amount of time for which you have had a card will factor into your credit score, as length of credit history accounts for 15 percent of your score. This may not mean a lot for a card you just opened, but if you have had a card for a number of years, you could risk lowering the average age of all your accounts if you close an older card.
Take away diversity
Having different types of credit can actually raise your score. Lenders like to see that you can responsibly handle all types of credit, and closing an account can hurt your credit diversity. These types of accounts can include standard credit cards, installment loans, mortgages and department store credit cards.
If you're still on the fence about what to do for a paid-off account or one that you can't handle, there are a number of options you can try:
- Talk with your lender about refinancing: Sometimes, you may want to close an account because you're having difficulty paying it off. High interest rates can be the main culprit for this, so see if you can refinance the account. You'll have to pay a transfer fee to deal with this, but a lower interest rate can help you make payments more easily.
- Use it sparingly: You still need to use your card to build up your score. Instead of canceling the card, designate its usage for a small part of your budget, such as lunch once a week or gas for your car every two weeks. This way you'll still be using it and be able to pay it off at the same time.