As important as paying off a credit card is, that part is actually fairly easy compared to what comes next. What’s next is hard because it’s actually a part time job to control our own finances. Only, not many people see it as such and even schools portray “finance jobs” as something you do for someone else, or another company. But everyone has a job to manage their own finances, and that goes often overlooked. Before I started collecting points and miles over 2 years ago, I knew I had to make it a point to re-evaluate my understanding of credit card use. Though I was never in any major credit card debt before, I did make credit card payments for the most part, sometimes even minimum payments. The bad part was that there was really no reason for it. I just wouldn’t feel like paying off that $500 credit card bill all at once, even though I could. When I would pay off a credit card, I’d enjoy the financial freedom momentarily, and then continue on with my old habits and start over accruing debt.
That all changed when I finally started educating myself on proper credit card use and I haven’t looked back since. I haven’t paid a dime in credit card interest in over 2 years, increased my monthly Roth IRA contributions, as well as my monthly savings. Please refer to my guide on how to pay off credit card debt.
What to Do after Paying Off a Credit Card
Once you’ve paid off your credit card (congratulations!), there are 4 things you should absolutely do.
- Continue to monitor account for 2-3 months
- Don’t close account
- Turn on “Automatic Payments”
- Continue to use the card
If you were paying interest on a credit card before, you will likely pay interest for up to 2-3 months after paying off that card. This is because the current billing cycle’s interest will reflect on the next billing cycle. The interest on that interest can then possibly even reflect on the billing cycle after that (compound interest). But after 2-3 billing cycles of paying off the balance in full, you should be back in the bank’s “Grace Period”, or a specific interest free period after closing of the billing cycle (usually around 25 days). You’ll want to keep your credit card account open because your credit score will take a hit if you close it. The average age of your credit card accounts will drop and your credit utilization rate will increase when you use a credit card again. Of course, if the card has an annual fee and is not worth it, then feel free to close that account. Otherwise, keep the account open. Next, if you haven’t done so already, automate your payments. Set it to “Pay off statement balance”. You’ll also want to use the card from time to time, even if it doesn’t earn rewards point or cash back. This is to avoid having the account closed due to inactivity. Since your payments should be automated by now, you have nothing to worry about when buying a pack of gum every 3 or 4 months.
Your credit card is paid off, you’ve taken proper steps to ensure your credit score doesn’t take a hit and have made sure that same card doesn’t get you in trouble again. This is great, but you’re not done yet. Now it’s decision time! If you’ve paid credit card interest until now, chances are that you haven’t really developed a sound credit card strategy for yourself yet. There are generally 3 “healthy” credit card strategies that are pretty common:
Cash/Debit Cards Only
- Credit card free
- Use “Credit” function of debit card if needed
Primarily Debit Cards/Cash
- Use debit cards/cash for day to day transactions
- Use credit cards for emergencies, vacations, etc.
Primarily Credit Cards
- Use credit cards for day to day transactions and whenever possible (usually for rewards)
- Resort to cash/debit only if needed
I will not recommend one specifically, as that is a highly personal decision to make. What I will say is that in any case, you should NEVER, EVER carry a credit card balance again! Also, generally what I see is that, people who primarily use debit cards or cash and use credit cards “part-time”, tend to be the ones racking up credit card balances over and over. This is presumably because:
- It’s the largest demographic
- It’s the group that usually doesn’t give credit card use too much thought
As an avid points collector, I’m obviously a “primarily credit card” user. If this is the route you choose, just make sure to create a budget. You should create one either way, but the consequences of going over budget are a little more severe if all you use are credit cards.
I know, this is a points and miles website, and I shouldn’t even advocate anything but credit card use. But the reality is that most people simply aren’t financially able to solely commit to credit card use just yet. It is a lifestyle change for most people and it shouldn’t be taken lightly. Credit cards can be amazing financial (and lifestyle) assets, but can also bring severe financial harm when not used with upmost discipline and care.
How do you use credit cards?