Paying off large amounts of credit card debt is a big accomplishment. When you pay off credit card bills, you may wonder if it makes sense to close those accounts for good. Here are some things to consider.

Credit Card Temptation

Whether it took months or years to pay off credit cards, you don’t want to backslide into any poor financial habits that contributed to credit card debt. Closing credit card accounts can remove the temptation to run up big bills again. While you may have good intentions about limiting credit card use and paying off the balance each month, it’s likely that won’t happen.

Credit Utilization Ratio

Each time you run up a balance on a credit card your credit utilization ratio changes. You can find that ratio by adding up all your credit card debt and dividing it by the total credit card limit for all your accounts. For instance, if you have credit lines totaling $25,000 and outstanding credit card debt of $10,000, your credit utilization ratio is 40%. Many credit card companies become concerned when an outstanding balance is more than 30% of an available credit line. When you carry too much debt you may see your credit score decline. You should pay down balances on other cards before closing credit lines if you want to keep your credit score from falling too much.

Credit Card Debt-to-Income Ratio

You also should look at how your debt-to-income ratio changes when you pay off debt. This ratio is found by adding up monthly debt obligations and dividing it by monthly income. For instance, if you owe $700 a month in credit card debt and earn $3,000 a month, the ratio is 23.3%.

Many people only think about the debt-to-income ratio when they want to apply for a mortgage or other type of loan. But you should always try to keep this ratio as low as possible. The higher the ratio, the more of a problem it can be for you.

Credit Card Companies and Fees

Due to recent changes in credit card regulation more credit card companies are charging inactivity fees. If you keep a credit line open but haven’t used it in the past twelve months, you may see an inactivity fee on your credit card statement. In some cases, credit card companies may simply close accounts that are not being used.

The bottom line is that you may see your credit score decline if you close credit card accounts. But if you are striving to live debt free without credit cards, as financial expert Dave Ramsey advocates, you are probably better off in the long run without open credit lines that are not being used.

Published 06/07/12 (Modified 07/09/14)