Should I Cancel My Credit Cards After I Pay Them Off?

Cancelling a credit card doesn't do anything positive for your credit score, and it could potentially harm it. The only reason to give thought to this move is to guard against the risks of borrowing more than you can afford to pay.

Your Credit History

A common misconception people have is that cancelling a credit card on which you have negative marks eliminates those marks from your report. This thinking is false, according to Bankrate. Positive and negative marks remain on your report for up to 10 years after the event occurred. Therefore, eliminating the card doesn't eliminate any damage that has already been done with it.

Negative Ramifications of Cancelling

When you close a card account, you impact your credit utilization ratio in a way that adversely affects your score, according to U.S. News & World Report. Your credit utilization ratio is the comparison of balances on accounts against available limits and is one of the most significant scoring factors. Closing a card reduces your available limit without impacting your balances. For instance, suppose you have $5,000 in credit card debt and an available limit of $20,000. Your utilization ratio is 25%. Then you close one of the card accounts to bring your available limit to $15,000. This reduces your utilization ratio to 33.3 percent, which hurts your credit score.

Closing an older account also adversely affects your average length of account history, another major factor in your score. It can also affect your mix of accounts, especially if you don't maintain other well-established credit cards.

Spending Habit Considerations

One factor that weighs in favor of closing a credit card account after you pay it off is concern about running the balance back up again. Excessive card use can lead to poor credit utilization ratios and missed payments, which damage your score. You might also face steep interest charges if you don't pay the balance in full each month. Even so, you have other options besides closing the card. The simplest is to cut up the card so you can't use it anymore, even though the account is still open. Even if you close the account, you may get tempted by one of many solicitations you receive in the mail from new providers. Thus, cancelling to avoid further spending really isn't a compelling reason to make this move. The best move is to discipline yourself against excessive credit card spending.