6 Things to Do After You Pay Off Your Credit Card

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Paying off your credit card is an accomplishment worth celebrating, especially if you started out with a very high balance. It can take months or years of financial discipline to pay off the interest, fees, and principle of a debt, but once your bill hits zero, you are free to build a new strategy with the money and the credit you've freed up.

Here are six ways you can put your extra money to good use:

Pay Off Another Credit Card

On average, Americans have four active credit cards, with an estimated balance of $6,194. If you have multiple credit card balances, paying off one is only the first step of your journey toward financial freedom. Once you’ve eliminated the first (or second) credit card bill, you could keep applying your financial discipline toward the next one. Consolidating multiple credit card debts into a single, lower-interest account is always preferable to having several active balances with separate terms, billing cycles, and interest rates.

If you're forced to maintain several debts at once, you'll get to zero sooner by making a large lump-sum payment toward a single balance each month rather than spreading the amount between all your accounts. Just continue making minimum payments on your other accounts to avoid late fees and keep your account in good standing.

Debt snowball and debt avalanche are two effective strategies for paying off credit card debt. With a snowball, debts are paid starting with the lowest balance first, helping you knock out small debt quickly. With an avalanche, the debt with the highest interest rate is paid first, which saves you money in the long run.

Pay Off Your Mortgage

With no outstanding credit card balances, you're free to divert more money to a mortgage payment and to accelerate your timetable for owning a house. If you purchased your home with less than 20% down, you likely have private mortgage insurance (PMI). Increasing the amount you pay each month (and thereby increasing your equity in the home) will get you off the hook for PMI and lower your overall monthly mortgage payment.

Make sure you contact your mortgage lender to cancel PMI once you reach 20% equity in your home.

Aside from ditching PMI, paying off your mortgage sooner will save you interest fees, and push you toward full homeownership sooner than if you were making the minimum required mortgage payments. Check your loan paperwork to be sure you won’t face any early payment penalties by paying your mortgage sooner than scheduled.

Pay Off Your Auto Loan

Your auto loan is another candidate for extra funds once you’ve paid off a credit card. You may even prioritize your auto loan over your mortgage, especially if your auto loan has a higher interest rate. The current auto loan interest rate on a 60-month new car is 4.43%. This rate may be high, compared to your mortgage payment where the national average on a 15-year fixed mortgage is 3.130%.

You’ll save money on interest and own your vehicle sooner. In some cases, your auto insurance rate will go down once your loan is completely repaid.

Put the Money in Savings

If you don’t have other credit cards or debts to pay off, the next best thing is to put the money in savings. You can contribute to your retirement fund, kids’ college funds, emergency fund, or vacation savings. Immediately after you've paid off your credit card, set up an automatic transfer for the amount you'd like to save each month, and schedule the transaction around your job's pay period.

Keep Your Credit Card Account Active

Paying off a credit card isn't like paying off a loan. When you pay off a loan, the account is considered closed and if you want to borrow more money, you’ll have to apply for another loan. Assuming your credit card account was in good standing when you paid off the balance, the account will remain open.

You don’t have to close the account unless it’s part of a larger plan to reduce the number of credit cards you have or to remove the temptation to overspend. If you use your credit card, make it a goal to pay off your balance in full each month so you won't get back into debt.

Keeping a paid account open can help your credit score by lowering your overall credit utilization. If the account has a long history, it will help your average credit age.

Try Living Debt Free

With your credit limit completely free, you may be tempted to rack up debt again. Avoid getting back into credit debt by charging only what you can afford and paying off your balance each month with no exceptions. If you can't handle just purchasing what you can afford, close your credit card and remove the possibility of getting back into debt. Try living a life where you don't worry about interest charges, late payments, or racking up credit card balances that cause you stress.

Frequently Asked Questions (FAQs)

How long does it take for my credit score to reflect a paid-off credit card?

Your credit score updates whenever the credit agency receives new information. Therefore, the time it takes to reflect a paid-off credit card depends on how often your credit card issuer reports your credit information. In general, you can expect companies to report your information at least once per month, but they may do it more frequently than that.

I paid off my credit card, why did my credit score go down?

All else equal, your credit score should go up when you pay off credit cards. If your credit score went down, your other negative credit activity must have outweighed the benefit of paying off your credit card. For example, if you pay off one credit card but build up debt on another, you won't benefit as much from paying off the first card.

What happens if I get a refund on a credit card purchase after I already paid it off?

If you get a refund on a credit card purchase that's already fully paid off, then you may end up with a negative balance on your credit card account. This negative balance can be used to reduce the cost of a future purchase. For example, if you have a -$5 balance and you make a $7 purchase, you will only owe $2 on that purchase.