When you pay off your credit cards, either by scrimping and saving the money to make extra payments of by taking out a consolidation loan to get rid of them, you may wonder if you should then cancel your credit cards.
The answer really depends on how well you are able to resist temptation and not use them to make a purchase when you don’t have the cash at hand. If you know that you won’t be able to pay off the card in full by the due date when the statement arrives, then the answer is “yes, cancel the cards”.
There are pros and cons to cancelling your credit card accounts that you should be aware of. When you cancel an account, you are restricting your borrowing power and have access to less credit. However, it is a positive thing for your credit score because you know that the possibility doesn’t exist that you will get into financial difficulty by using the card if you choose to keep the account open. Since your credit score depends on your debt to income ratio, you will have a higher score if you don’t carry a balance and still have available credit on the card.
This won’t happen right away as soon as you notify the company that you wish to cancel your account. On average it takes about eighteen months after you do cancel an account for this to take effect, but it does depend on the credit card provider that you deal with.
Cutting up your credit cards is not the same as cancelling your account. While most people do cut up the card when they don’t intend to use it again, once you approach the expiry date on the card, the company will send you a new card. Then the temptation is there again for you to start using it. If you intend to cancel the account completely, you need to put the request in writing.
A phone call is not acceptable as a request because the company needs to have your signature in order to put the cancellation into effect. This action may also have other benefits because once you do contact the credit card provider with your cancellation request you may receive other offers and benefits just to remain as a customer. You should also follow up the written request with a phone call after a few months just to make sure the account has actually been cancelled.
You do need to keep at least one credit card account open, even if you don’t intend to use it. This will give some leeway in times when you do need to make a purchase or to obtain money from an ATM when you just don’t have cash at that time. Emergencies always crop up at the most inopportune times and this is when a credit card can come in handy. Keep the cards locked away for times like this and only use them if you absolutely have to.
Having one credit card to use and paying off the balance in full at the end of the month is also beneficial in rebuilding or maintaining your good credit rating. If you take advantage of an offer for a credit card that has no interest charges for an introductory period, then you can actually make money by leaving your cash in your savings account where it gains a small amount of interest. With no interest charges, you can afford to carry a balance at the end of the month as long as you have the outstanding balance on the card paid in full before the introductory period ends.
