Yay! 3 cards paid off. Now what?

Should you cancel them or keep them open?

By Erica Sandberg

Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
I'm paying off three credit card balances in full today. Should the cards be closed immediately or left open? What is the best thing to do regarding my credit score?  
-- Brennen 

Answer Dear Brennen,
There is nothing quite like the thrill -- and relief -- of finally deleting a loan or credit card balance. Three at once is quite an accomplishment.

What to do with the accounts after you've deleted the debts, though, depends on your objective. If you want to maintain high credit scores, you'll not only want to keep the accounts open, but active.

Timely payments are the weightiest factor in virtually all credit scoring models. For example, it comprises 35 percent of a FICO score, which is the most commonly used scoring system today. Paying loans and lines of credit on time and preventing any other bills (such as mortgage and car loans) to slide into collections is essential.

Length of credit history is another scoring factor, and takes into consideration the last time you charged or borrowed. Recent activity assumes a greater scoring role than that which is older, so if you have high scores now and want to keep them elevated, your best course of action is to hang on to the accounts. Continue to charge and repay, at least occasionally.

Mind that even if you were to cancel your cards, the positive actions with them wouldn't disappear. At least not right away. Details about closed but well-handled accounts remain on your consumer credit reports (and therefore used in the scoring calculation) for up to 10 years.

Back to your goals. In general, it is a good idea to have scores in the high range, but I also encourage people to keep perspective. These are just numbers! Sure they are used by lenders and other businesses to assess risk and set rates and terms. And yes, better scores typically translate into better offers. But they don't rate you as a person. If you concentrate on ensuring your overall financial health, not only do those numbers naturally tend to be robust, so too will your net worth.

Now that you're debt-free (at least with these cards), stay that way:

  1. Develop a fresh budget. Because a portion of your income isn't promised to those payments anymore, figure out what you're going to do with the extra money. Perhaps you've been scrimping to pay these cards down at an accelerated pace, so go ahead and indulge a bit. Just be sure to pad (or open) a savings account to guard against future financial emergencies.  
  2. Establish a new charging plan. Figure out when and where you want to use these three cards. For example, if you have a gym membership or some other revolving charge on one, keep it for that expense. Swipe another for gas, and the last for groceries or another essential expense. As long as you can easily cover the bills in full and pay on time, your scores will remain in fine shape, and you shouldn't be incurring any interest charges.  
  3. Review your reports. Plenty of credit reports contain mistakes and even evidence of fraud. A month or so after sending your last payments to these creditors, access your reports from and make sure that nothing is on there that shouldn't be. Don't worry, pulling your own credit reports won't affect your scores, and it's even free (once a year from each credit bureau). After that, check them at least once a year.

You've done the hard part, Brennen, now all you have to do is ride the wave. It won't take much to ensure that not just your credit scores but overall finances are impressive from this point forward.

See related: FICO's 5 factors: The components of a FICO credit score, Pay off balances or close accounts to boost credit score?

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Published: July 16, 2014

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