The average U.S. household has $5,234 in credit card debt, so paying off yours is a huge accomplishment. But now that you’ve paid it off, what are you supposed to do with the card?
Unfortunately, there’s no one-size-fits-all answer to that question. It’s important to know what your options are so you can decide which one is best for you. Here are six things you can do with your credit card after paying it off.
1. Get on a budget
A budget is the most basic financial planning tool you can use. And if you got into credit card debt because of a spending problem, a budget also can help you keep your spending in check.
You can create a budget by using pen and paper, an Excel spreadsheet, or a budgeting app such as Mint or You Need a Budget. Start by calculating your monthly take-home pay and main expenses. Then track the other ways you’ve spent your money over the past few months to round out the picture.
This exercise will give you an idea of where your money goes and where you can cut back. Once you’ve done it, create some spending goals for the next month and work hard to stick to them. If you’re budgeting successfully, you might be able to handle using credit cards responsibly going forward. But if you’re struggling, it might be worth choosing one of the other options discussed below.
2. Keep using the card
Using a credit card responsibly can help you build and maintain a good credit history. If your credit card offers rewards, you can gain even more value out of your everyday spending.
This option works best if you’re on a budget and sticking to it. If you can do that successfully and start developing good spending habits, you can limit the danger of getting into debt again. Also, you’ll want to set a goal to pay off your credit card balance on time and in full each month to avoid interest charges.
3. Cancel your card
If you’re concerned about getting sucked back into a toxic debt situation, closing your credit card account might be a good idea. But keep in mind that canceling your card can affect your credit score.
First, it reduces your available credit. “If this one card has a significant percentage of your total credit limit across all your credit cards, then closing it could significantly increase your credit utilization,” said Brad Barrett, a certified public accountant and credit card expert at Travel Miles 101. And a higher credit utilization ratio can result in a lower credit score.
You can calculate your credit utilization ratio by dividing your balances by the total amount of your credit limits. For example, let’s say you have three credit cards:
- Card A: $0 balance, $5,000 credit limit
- Card B: $500 balance, $1,000 credit limit
- Card C: $1,000 balance, $2,500 credit limit
Your overall credit utilization ratio on these cards is roughly 18%, which is below the 30% threshold that many credit experts recommend. But if you cancel Card A, your credit utilization will go up to almost 43%, which exceeds that threshold.
What’s more, keeping the account open can help your credit score, even if you don’t use the card regularly. That’s because the open account contributes to your average age of accounts; the higher your average, the better it is for your score.
This isn’t necessarily a recommendation to keep your credit card open. Rather, it’s an encouragement to understand how the decision can affect you and to act based on that knowledge.
4. Leave the account inactive
If you aren’t sure you want to cancel your credit card, but you don’t want the spending temptation either, stick the card in a sock drawer or cut it up. You can ask for a replacement card in the future when you want to start using the account again.
The only pitfall with this strategy is that the credit card issuer could close the card due to inactivity. If you’re concerned about this, you’ll need to contact the issuer to check its policy regarding inactive accounts.
“From my research, there’s no hard-and-fast rule on when the issuers close accounts due to inactivity,” said Barrett. “I’ve seen it as short as one to two years, or in some cases, I’ve personally had cards with no activity for five-plus years that remained open.”
5. Put the card away but keep it active
If you want to keep your account open but not use it regularly, there are two ways to keep the card active. The first method is to put a small, recurring charge on the card, such as a Netflix or Spotify subscription. Then set up automatic payments from your checking account to pay your card balance, so you don’t have to worry about forgetting to make the monthly payment.
“A second option would be to put a reminder in your calendar to make one charge on the card every six months or so,” said Barrett. “This should be sufficient activity to keep the card in good standing.”
6. Downgrade your credit card
One reason why you might be considering canceling your card is that it has an annual fee. However, you might be able to keep the account open without the annual fee.
“If there is an annual fee and you aren’t getting value from that card any longer, you can usually downgrade to a no-annual-fee card and keep your credit history [with the card] intact,” said Barrett.
To downgrade your credit card to one without an annual fee, call the number on the back of your card and ask if the option is available. If so, the credit card issuer can process the downgrade and send you a new no-annual-fee card.
Next steps: What to do with your credit card
To determine what the next best step is for you and your credit card, it’s important to consider your financial situation and how the credit card can impact it. If holding on to the card could pose a threat to your debt-free moment, you might be better off saying, “good riddance.”
But if you can manage to use your credit card to boost your credit score or rack up valuable rewards without getting back into debt, keeping the card could be a worthwhile strategy.
Take the time to think it out and decide what’s best for you and your finances.
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