Should You Keep a Paid Off Credit Card? Impact on Your Credit Rating

Paying off a credit card is often seen as a step towards financial freedom, but should you keep the card open? This article delves into the nuances of whether it is beneficial to maintain a paid off credit card, considering its impact on your credit score and the strategic value it offers.

Understanding the Impact of Credit Card Availability on Your Credit Score

The availability of credit on credit cards makes up a significant portion of your credit rating. Specifically, 30% of your credit score is influenced by your credit utilization, which is the ratio of your total credit limit to the amount you are using. Therefore, even if you have paid off a credit card, the presence of the available credit can still positively affect your score.

Counterintuitive Benefits of Keeping a Paid Off Credit Card

While it might seem logical to cancel a paid off credit card, doing so can negatively impact your credit score. Credit card companies often use your creditworthiness to offer you other cards. Typically, you receive invitations either by email or mail stating that your excellent credit score makes you a candidate for various credit cards. By canceling a card, you reduce the available credit, making it appear as if you are closer to your credit limit. This can lead to a higher utilization ratio, which can harm your credit score.

Strategies to Maintain Your Paid Off Credit Card

To keep your credit utilization low and maintain your credit score, consider the following strategies:

Finely Tuned Usage: If you're not charged an annual fee, keep the card open and use it infrequently. For example, charge a small purchase like gas once every six months and pay it off in full. This practice can help maintain the card's presence in your credit portfolio without adding to your debt burden. Secure Storage: Store the card in a safe place to avoid accidental charges. Once the card renews or you receive a new one, shred the old one and securely store the new one. Active Account Management: Regularly check your credit reports to ensure that the card remains active and that it is not flagged for cancellation due to inactivity.

Conclusion

In conclusion, maintaining a paid off credit card can be more advantageous than canceling it for several reasons. It keeps your credit utilization low, which is crucial for your credit score. Additionally, it allows you to take advantage of promotional offers and maintains your credit history. If you don't have to pay an annual fee, it's recommended to keep the card and use it responsibly to maximize its benefits.