7 Things That Happen After You Pay Off Your Credit Card
Paying off your credit card balance is a huge accomplishment, especially if you started out with a four- or even five-digit balance. It can take months, sometimes even years of sacrifice to finally pay off your credit card balance. Once your balance is paid off, you’ll have to decide what to do with the money and the credit you've just freed up. Here are some good ways you can use that extra money.
You Can Use the Money to Pay off Another Credit Card
If you have multiple credit card balances, paying off one of them is just the beginning of your journey to debt freedom. Now that you’ve knocked out the first (or second) credit card balance, you can apply the same force to the next credit card balance. Applying a large lump sum payment to your balance each month helps you pay off your balance much sooner than if you spread your payments across all your debts. Just make sure you continue making minimum payments on all your other accounts to avoid late fees and keep your account in good standing.
You Can Pay off Your Mortgage
Speed up the time it takes you to completely own your home by diverting your extra money to your mortgage balance. If you purchased your home with less than 20% down, paying down your mortgage will help you get rid of your private mortgage insurance. Increasing the amount of equity you have in your home can get you off the hook for PMI and lower your monthly mortgage payment.
You may have to contact your mortgage lender to to cancel PMI once you reach 20% equity in your home.
Aside from ditching PMI, paying off your mortgage sooner can save interest and push you to full homeownership years sooner than only making your required mortgage payment. Check your loan paperwork to be sure you won’t face any early payment penalties by paying your mortgage sooner than scheduled.
You Can Pay off Your Car Loan
Your auto loan is another candidate for payoff 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 high interest rate. 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. And with your auto payment and credit card payment out of the way, you’ll have more funds available for your other financial goals.
You Can 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 fund, emergency fund, or vacation savings. It'll be easier if you divert the funds to your savings goal immediately after you've paid off your credit card by setting up an automatic transfer. It's harder to save the money once you get used to spending it.
Your Account Will Remain Open Unless You Close It
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 still be 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. If you use your credit card, make it a goal to pay off your balance in full each month so you don't get back into debt.
Keeping a paid account open can help your credit score by lowering your overall credit utilization. Plus, if the account has a long history, it will help your average credit age.
Your Credit Score May Not Go up Significantly
Your credit score has probably already improved over time since you’ve been making consistent on-time payments and reducing your balance little by little. Continue to use debt responsibly to maintain the credit score you’ve built.
You May Be Tempted to Get Into Debt Again
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, no exceptions. Alternatively, closing your credit card removes the possibility of getting back into debt.