Why You Probably Shouldn't Close a Credit Card After You Pay It Off

Don't rush into canceling the card or you might regret it.

If you've been working on paying down credit card debt and you finally get your balance to $0, you may be considering closing the account. After all, if you don't plan on using the card any more, you may see no reason to continue to maintain the account.

The reality, however, is that it's often a really bad idea to rush into calling your creditor to shut your account down. Here's why.

Closing an old credit card can have this damaging effect

Although closing an old card down may feel good, it could hurt your credit score in several key ways.

First and foremost, when you close the account down, it will no longer show as an active account on your credit report. The average age of your account history will be shorter because this older card is no longer active. The average age of your credit record is one of the factors that is used to determine your credit score. And it's considered better to have a longer track record of borrowing behavior rather than a shorter one.

And, while the account won't disappear from your credit history right away, eventually it will drop off your credit report entirely. If you have a positive payment history with the account, there's little reason to lose that by closing the account -- especially if you can just keep it open and continue to get a record of on-time payments since you aren't charging anything on it. Payment history is actually the most important factor that determines your credit score.

Closing the account will also reduce the amount of credit available to you. Since credit used versus credit available is another key component of your credit score, called your credit utilization ratio, this can do serious damage to your credit.

If you previously had $10,000 in total credit and you close an account with a $5,000 limit, you now only have $5,000 in credit available. If you have a $1,000 balance on the open card, your credit utilization ratio would immediately jump from 10% to 20%. While this number needs to be kept below 30% to avoid damaging your credit score, the lower your utilization ratio the better when it comes to your credit record.

Since there's a few different ways closing an old card could hurt your credit, doing so is rarely worth it.

Now, there may be limited exceptions if you have a secured card and want to get your deposit back or if the card has a high annual fee. But even in these situations, it's worth calling the creditor and asking if you can switch to a different card in their lineup instead rather than closing the account down entirely. This could potentially allow you to shift to an unsecured card or a card with no fee while still maintaining your account history.

Ultimately, your credit score is really important and closing old accounts can hurt it -- so try to avoid doing it unless you have no other options.