What happens if I pay off a credit card and never use it again?

Impact of Paying Off and Closing a Credit Card

When you pay off a credit card and consider closing it, it’s essential to be aware of its potential impact on your credit score. While it may seem like a responsible move, closing a paid-off credit card can have certain consequences:

Reduced Available Credit

Closing a credit card reduces your total available credit, which can affect your credit utilization ratio. Your credit utilization ratio is calculated by dividing your current credit usage by your available credit. A high credit utilization ratio can negatively impact your credit score, as it suggests that you may be overextending yourself financially.

Shorter Credit History

Closing a credit card also shortens your credit history. The length of your credit history is a significant factor in determining your credit score. Longer credit histories generally indicate greater financial stability and responsibility. Closing a paid-off credit card can reduce the average age of your credit accounts, potentially lowering your score.

Maintaining a Healthy Credit Profile

To maintain a healthy credit profile, it’s advisable to keep your credit utilization ratio low, even if you don’t actively use all your credit cards. Instead of closing a paid-off credit card, consider leaving it open and using it occasionally for small purchases. This will help keep your credit utilization ratio low and maintain the length of your credit history.

Exceptions

There may be instances where it makes sense to close a paid-off credit card. For example, if you have a high number of credit cards and are struggling to manage them effectively, closing a few inactive accounts can simplify your finances. Additionally, if the credit card has an annual fee that outweighs the benefits of keeping it open, closing may be a reasonable option.

Conclusion

Before closing a paid-off credit card, carefully consider the potential impact on your credit score. Maintaining a low credit utilization ratio and a long credit history are crucial for a healthy credit profile. If possible, it’s advisable to keep paid-off credit cards open and use them occasionally to maintain their status. However, if you have a compelling reason to close a paid-off credit card, be sure to weigh the potential consequences carefully.