What Happens After You Pay Off Your Credit Card?

In most cases, paying off a credit card will have a positive financial impact. Unless you're settling the debt instead of paying it in full, your credit score will likely improve. You'll also have more money to apply to other debt, start an investment program or put money away for retirement or your kid's college education.

Credit Report Status

When you pay off a credit card, the status of the account will also be updated on your credit report. If the account had been past due, paying off the card will change the status to current, and the report will indicate "current was x days past due." If you were never late on a previous payment, the account will continue to read "current never late." Your outstanding balance will also show as zero, which is a favorable indicator to other potential creditors.

Continuing Debt Reduction

A benefit of paying off a card is that you've now freed up the money you were using to pay off the card, which you can now apply to other debt if you choose. One option is to use the "snowball" method of debt reduction where you apply as much money as you can to your largest debt while paying the minimum balance on the others. When you retire the largest debt, apply that payment to your second-largest debt, and so on until you are completely debt free.

Canceling the Card

When you finally pay off a credit card, you may be tempted to cancel the account to avoid future debt problems. However, this is not always a wise choice. Canceling an account lowers your credit utilization rate, an important factor in determining your credit score. The utilization rate compares the amount of credit you actually use to the amount of your total available credit. The lower the ratio of used credit to available credit, the more positive the impact on your credit. Instead of canceling the account, cut up the card or put it somewhere that is difficult to get to.

Debt Settlement Ramifications

It is possible that paying off an old credit card debt can have a negative impact on your ability to obtain future credit. If the account is delinquent and you settle with the card issuer for an amount that is less than what you owe, the account may show as "settled" on your credit report, which can be a red flag to future creditors. If you do choose to settle with the credit card company, ask the company to note the account as "paid in full" instead of "settled" on your credit report as part of the settlement negotiation process.