You’ve done your research and come up with a plan you could live with. Maybe you took side gigs or cut your housing expenses. Maybe you canceled unused subscriptions and negotiated other monthly bills, or just resisted the madness of this impulse purchase. Congratulations, you’ve finally paid off your credit card debt! And now?
After working so hard to get free from credit card debt, an understandable immediate reaction might be to cut your cards once and for all – but that might not be the best move, for a variety of reasons. In fact, keeping your cards and using them as a budgeting tool rather than a loan can be good for your financial future.
Once you’re free from credit card debt, here are four steps you can take to help keep your momentum going.
1. Keep your cards open, if that makes sense
Sometimes it might be a good idea to close your cards – if, for example, you’re charged an annual fee on an account you never use. But closing a credit card could hurt you in terms of credit ratings.
It is because one of the greatest factors in your credit scores is your credit utilization ratio, or the amount of credit you use compared to the amount you have. The lower this ratio, the better.
But if you close your cards, you lose those lines of credit, which could increase your credit usage and therefore hurt your scores. Depending on how long the card is open, closing it can also negatively affect your average age of accounts openedwhich could also affect your credit ratings.
If your scores drop, it could be harder to get a loan for a new car, qualify for a new apartment, or get the best interest rate on a mortgage.
2. Start an emergency fund, tackle other priorities
A 2018 Federal Reserve study noted that 40% of Americans would struggle to find enough money to cover a $400 emergency expense. The good news for you is that now that you’re no longer using some of your monthly income to pay off your credit card debt, you can put some of that money aside for your emergency fund.
So if your car won’t start suddenly, your basement floods, or you face an unexpected job loss, you won’t need to resort to a credit card to cover your bills. This is a crucial step to ensure that you don’t fall back into debt.
Financial experts recommend having enough savings to cover three to six months of expenses, but don’t let that number scare you. Start with a goal of saving $500 in your emergency fund and build from there. Take the time to create a monthly budget and regularly allocate money to replenish your fund. You can automate the process by depositing part of your salary directly into a savings account. It’s harder to “run out” of money that never makes it to your checking account to begin with, and a separate account can also make it harder to access that fund on a whim.
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And now that you’ve gotten rid of those double-digit credit card APRs, think about what else you could do with the money you freed up each month. You can focus your attention on other balances with lower interest rates — student loans or auto loans, for example — or you can dedicate more of your paycheck to your retirement nest egg or retirement fund. studies of a child.
3. Reevaluate your existing plastic
Chances are that the cards you used to incur debt are no longer the most beneficial products for you.
Maybe you took advantage of a Credit card with 0% balance transfer offer when you pay off your debt. But now that your debt is paid off, is this card still right for you? Or maybe you had a secured credit card that helped build your credit, but now that your score is in better shape, that might not make sense. Or you simply don’t want to pay the annual fee anymore.
In these cases, rather than simply closing the account, it may be worth seeing if you can upgrade or downgrade your card to a different version that better suits your current needs. This way you will keep your credit history intact and avoid a hard shot — and the accompanying drop in credit score — for a whole new app.
On the other hand, keep in mind that the card you have may still be suitable for your spending, even if your goals have changed. For example, let’s say you opened a Citi® Double Cash Card – 18 Month BT Offer for its excellent cash back rate, but now you want to accumulate travel rewards instead. From the rewards on the map transferable in ThankYou pointsyou can still use it to fund your trip without changing cards.
4. Look for richer reward opportunities
Rewards credit cards offer all sorts of lucrative bonuses and perks. Of course, they also tend to have high APRs, but now that you pay your credit card bills in full and on time each month, the APR is no longer relevant. You don’t arouse any interest.
Many rewards credit cards require good to excellent credit to qualify, which usually means FICO scores of at least 690. But with your improved balance sheet, you can now have access to some of these offers.
Entrepreneur Shubhayan Mukherjee says he found himself in $300,000 in credit card debt while trying to start a new business. “Because of high debt,” he says over email, “we didn’t qualify for the best rewards cards before. But with the debt paid off, we were getting better sign-up offers for rewards cards credit.
Still, always understand the terms and conditions before jumping into a new rewards credit card. Many offer amazing bonuses to new cardholders, for example, but make sure you know the real value of those points. And above all, do not spend beyond your means just to get a bonus.
“The key is not to spend what you can’t pay back in full at the end of the month,” says Mukherjee.
About the Author: Erin Hurd is a travel rewards expert at NerdWallet. His work has been featured by The Daily Reckoning, International Living, Personal Finance and FinanceBuzz. Read more