Free from Credit Card Debt? Now What?

The good feeling you get for paying off a credit card can be replaced with a vague feeling of “What do I do next?” Often, that leads to a decision about keeping the card open or closing the card. Here are some factors to help you decide.

Studies show that Americans aren’t exactly doing a great job paying off their credit cards. According to a study by credit ratings giant Experian (Stock Quote: EXPN), 51% of Americans have at least two active credit cards. And according to an April 2009 study from Nilson Report, 78% of U.S. households had one or more credit cards open at the end of 2008. That’s up about one million new households from 2007, despite the ravages of the economic recession.

But even as a broken clock is right twice a day, somewhere across the U.S. today – and every day – there’s a celebration going on in a U.S. household whose occupant has finally paid off that burdensome credit card bill.

But after the party comes the hangover. Specifically, what do you do next after your card is paid off? The temptation to re-use it – and potentially trigger a new hike in your credit card bill – is a strong one, so maybe you should close down the account.
If you do, you’ll definitely banish any temptation to use the card – credit card companies won’t honor a card that is inactive. But you might open up a new can of worms by shuttering your credit card.

Here are some pros and cons.

Pros . . .

Big savings - When you close your account, you’re taking a real budget-buster off the books. According an Experian-Gallup survey, the average monthly spending on a credit card without a rewards program is $465.

Reduced fraud risk – When you close a credit card, you also eliminate any opportunity for a scam artist to rip off your credit card number. Credit and debit card fraud is the top fear of Americans in the midst of the global financial crisis, according to a report by Unisys. That anxiety fades away when the card is taken off the grid.

No nasty rate surprises – It’s not just the purchases you make with a credit card that gouge into your household budget. It’s also the onerous interest rates attached to the card – especially the higher rates that come with late payments – that can decimate your budget.