Paying off a credit card is a great feeling and frequently the first step to financial freedom. However, you may think to yourself: “What next?” Should you keep the card open or close it entirely?
It may be tempting to leave it open as an emergency fund, but the temptation credit cards cause make them poor emergency funds. Instead, you should aim to build a cash emergency fund in a savings account. Credit card debt cripples millions of Americans every year, but there are debt attorneys who can help. Here are a few things to keep in mind when deciding to close a paid-off credit card.
Identity Theft Risk
Having a credit card open creates a small amount of risk with identity theft. When your card is stolen, someone takes the card number and uses it to make undesired and often expensive purchases, leaving you to clean up the mess. It’s usually easy to fix these issues, but it’s still a headache. Even though the risk of identity theft on a single card is relatively low, dealing with the consequences could be long-lasting.
Downsize Your Credit Cards
If you have multiple credit cards, you may want to consider downsizing. You still have to monitor a credit card with a zero balance for fraudulent activities. Closing a paid credit card can help you manage your finances and decrease the chance of increasing your debt.
The credit cards you first started with may no longer be of any real use to you. Low credit limits and minimal rewards do not entice you to use it. Keep in mind, though, you should always keep your oldest credit card open. Having credit cards open for a long time shows you have significant credit card history and know how to handle credit cards responsibly.
Credit Limit Across All of Your Cards
A vital factor to consider when closing a credit card is how it will affect your overall credit limit. One significant component of credit scores is credit utilization. It’s the total amount you owe across all your credit cards divided by the total credit limit on all cards. In general, a lower percentage is better, and canceling a card may increase that percentage. If you’re carrying a large balance on other cards, you may want to pay those down before closing a card.
What Closing a Credit Card Won’t Do
A common misconception in closing credit cards is that it will remove any payments you owe on it. Companies may not force you to pay the full remaining balance right away, but you’ll still have to pay monthly installments. Every credit card company will have different rules when it comes to closing unpaid credit cards. It’s also important to remember that you will most likely lose any rewards, so make sure to use them before closing.
Many also think closing credit cards will improve their credit score, but it won’t. Additionally, your credit usage will go up if you have unpaid balances on other cards. If the closed card is your oldest, it will shorten your credit age. Both of these can have negative impacts on your score.
When to Leave a Paid Credit Card Open
In some cases, leaving a paid credit card open can increase your credit score. You should also keep it open if it’s the only card that still has a line of credit. Keeping the card open can also improve your credit utilization.
You should also know that credit scores benefit from having a mix of accounts on your credit report. By having a paid-off credit card and an active loan, your credit score could increase.
However, most credit card companies will close an inactive account after a few months of inactivity. So, make sure to make small credit purchases once every month and pay off the balance immediately.
Ultimately, if you have a high credit score and older credit cards, closing a paid card may not hurt your credit score.
Expert Debt Settlement Attorneys at McCarthy Law
If you’re struggling with credit card debt, consider reaching out to the expert debt attorneys at McCarthy Law. We have offices all over the country, and our team dedicates themselves to helping you get your life back on track. McCarthy Law helps people in difficult financial situations with too much debt or errors on their credit reports.
We believe that finances are a very personal matter that you should discuss with an experienced debt settlement attorney. Call us today at (855) 967-5777 or complete our online contact form to schedule your free consultation. We’re here to help you!
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