What Happens After You Pay Off Your Credit Card

© Walker and Walker / Stone / Getty

Paying off your credit card balance is a huge accomplishment, especially if you started out with a four- or even five-digit balance. Once your balance is paid off, you’ll have to decide what to do with the funds you’ve freed up in your budget and your newly available credit.

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.

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. Being able to apply a large lump sum payment to your balance each month helps you pay off your balance much sooner. Just make sure you continue making minimum payments on all your other accounts.

Pay off your mortgage. Speed up the time it takes you to completely own your home by diverting the money you used to spend on credit card debt to your mortgage. If you purchased your home with less than 20% down, you may be spending extra money on 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.

Aside from ditching PMI, paying off your mortgage sooner can save interest and push you to full homeownership years sooner than 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.

Pay off your car loan. Your auto loan is another candidate for payoff after you’ve paid off your credit card. You may even prioritize your auto loan over your mortgage, especially if your auto loan as a high interest rate. You’ll save money on interest and own your vehicle sooner. 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. Divert the funds to your savings goal immediately after you've paid off your credit card.

Your account will remain open unless you close it. 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.

Your credit score may not go up significantly, but your credit score has probably already improved 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.

Don’t get back in debt. With your credit limit completely free, you may be tempted to rack up debt again. Resolve to pay in full any balance you do charge. Or close your credit card if you want to completely remove the possibility of getting into debt.