Should you leave a credit card open after you pay it off?

scissors cutting up credit cardsYou just finished paying off a credit card (congratulations!) – but now you’re wondering what to do with that old card?  I am often asked by people who want to build good credit, “Will it help my credit score to leave my old card open?”  The answer is yes – with a caveat.

To make a wise decision, you need to understand some of the factors that go into creating your credit score.  By far, the biggest influence on your credit score is paying your bills on time – every time.  But beyond that, there are two other major factors that you are graded on:  (1) how much of your total available credit you are actually using, and (2) the average age of your lines of credit.

(1) Total Available Credit: To give the biggest boost to your credit, you should never use more than 30% of your total available revolving credit.  So, if all of your credit cards combined give you access to $5,000 in available credit, you should never carry a balance of more than $1500 at any given time.  If you pay off a credit card and leave it open, that paid-off credit line will help lower the overall % of debt that you are using in this formula.  That’s a plus for your credit.  However, if you don’t have a lot of credit card debt (at least in comparison to your available credit) then leaving the card open won’t benefit you on this particular factor.

(2) Average Age of Accounts: Credit bureaus favor people who have more credit experience.  One way this is scored is by averaging the length of time that you have had your credit cards open.  Someone who has had 3 cards open for 10 years each will score higher than someone who has had 3 cards open for 1 year each.  If you close a card that you have had open for a long time, that will drop your score.  However, closing a relatively new card will have a minimal impact.  (Note: This also comes in to play when you open a new card! The new card will cause your total “average age” of credit to be lower and this will temporarily drop your score… but usually with 6 – 8 months of positive history, it will go back up).  I should point out that of the three factors discussed here, this one is weighted the least.  While it does factor into your score, unless you do something excessive, it should not make a large permanent impact either way.

So what’s the catch?  It sounds like leaving your old credit cards open is a no brainer!  Well, maybe not…  in fact, I would encourage most people to close their cards once they are paid off.  Here is where those caveats come in…

The first caveat is self-control.  If you will be tempted at all to use the card that you have paid off, then you should close it.  This is where you need to take an honest look in the mirror — know your limits and your temptations.  It is better to take the minor credit hit of closing the card than to run the balance back up.  When my wife and I paid off a credit card, we decided to leave it open for the credit benefits.  That card never sees the outside of a safe.

If you have self control covered, there’s one more consideration: credit fraud.  An open credit card account can never be “out of sight, out of mind”.  Although it is somewhat rare, an inactive card makes a prime target for fraud!  And if you’re not checking the account regularly, you will only find out that you are a victim after the damage has been done.  Typically, you only have 60 days to dispute a fraudulent charge.  If you’re going to leave an account open, make a regular habit of accessing the account online every time you pay your monthly bills.

In the end, whether you leave that old card open or not is really up to you.  When in doubt, The Money Dad says to just go ahead and close it to be safe.  But, as long as you understand the benefits and disadvantages, you can make a wise decision that fits your philosophy and lifestyle!

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