Should I cancel my credit card after paying it off?

Keep Your Credit Card Active: Why Closing Zero-Balance Accounts Can Hurt Your Score

Maintaining a positive credit history is crucial for financial stability. One aspect of credit management is wisely handling your credit card accounts. While it may seem logical to cancel credit cards after paying them off, this decision can negatively impact your credit score.

Credit Score Implications

Your credit score is calculated based on various factors, including the number of open accounts, the length of your credit history, and your payment history. When you close a credit card account, you are essentially reducing the number of open accounts, which can lower your score. Additionally, closing a long-established account can shorten your average credit history, which is another important factor in credit scoring.

Benefits of Active Credit Accounts

Keeping established credit card accounts open, even if you don’t use them frequently, offers several benefits:

• Preserves Credit History: Inactive accounts still contribute to your overall credit history, which is especially valuable if you have a long-standing relationship with the credit card issuer.
• Reduces Credit Utilization Ratio: Your credit utilization ratio measures the amount of credit you’re using compared to your available credit. Keeping credit accounts open gives you a buffer, which can improve your ratio and positively impact your score.
• Improves Debt-to-Income Ratio: Having multiple credit lines can lower your overall debt-to-income ratio, which is another factor that lenders consider when assessing your creditworthiness.

Exceptions to the Rule

There are certain situations where closing a credit card account may be advisable:

• If you have too many credit accounts open and closing one will significantly reduce your overall credit utilization ratio.
• If the credit card has an annual fee that outweighs the benefits of keeping it open.
• If the credit card company has engaged in predatory practices or has compromised your financial security.

Conclusion

In general, it is advisable to keep established credit card accounts open, even if you have paid them off. Closing inactive accounts can negatively impact your credit score by reducing the number of open accounts, shortening your credit history, and potentially increasing your credit utilization ratio. By maintaining active credit accounts, you can preserve your creditworthiness and improve your chances of securing favorable credit terms in the future.