Balance transfer credit cards can be a valuable tool if your goal is to become debt-free. After all, cards in this niche offer 0 percent APR on transferred balances for an introductory offer period, which can help you save money and pay down debt at a considerably faster pace.
But, what happens after you pay down your balances to zero? Does a credit card balance transfer close the account? And is it bad to cancel a credit card once the balance transfer has been paid off in full?
If you have successfully used a balance transfer to eliminate all your credit card debt, you will probably wonder what happens next. While your next move is ultimately up to you, you should know about the pros and cons of closing your card or keeping it for the long haul.
What happens after you pay off a balance transfer?
Paying off a balance transfer is a huge accomplishment, and it’s one that will have only positive consequences on your finances. You paid down debt, which means you won’t have to pay interest on previous balances going forward. Since your credit utilization makes up 30 percent of your FICO score, you may have also seen dramatic improvements to your credit while you were in debt payoff mode.
Once your debt is behind you, it’s important to think long and hard about what you can do to avoid racking up more credit card debt in the future. To help manage your expenses and steer clear of additional debt, you might create a monthly budget or spending plan that ensures you can afford to pay your regular bills and credit card charges in full every month.
Although you may have opened a balance transfer card with the sole purpose of consolidating and paying off your debt, the account won’t automatically be closed after you pay off the balance. After all, a regular credit card and an introductory APR are likely just one of many card features. You’ll need to decide whether you’re going to continue to use the card (and any other credit cards) for regular purchases or if you’re better off switching to cash or a debit card instead.
Should you cancel your balance transfer card?
You might be wondering if it’s bad to cancel your credit card. It depends. Mostly on whether you’ll be able to benefit from the many upsides of using credit responsibly or if having access to a credit card will make it difficult to stay out of debt. At the end of the day, you’ll need to make the right decision for your situation. Here are some important factors to keep in mind.
For starters, you should know that the average length of your credit history makes up 15 percent of your FICO score. As a result, keeping your balance transfer account open in good standing can provide a boost to your credit whether you continue using the card or not. Also, by and large, most balance transfer credit cards don’t charge an annual fee. This makes it easier to justify keeping your card, regardless of how often you use it.
If your balance transfer credit card lets you earn rewards points or cash back, you could also start using it for purchases and get something in return. Just remember that you should only charge what you can afford to pay in full each month, or else you could easily wind up in debt again.
How canceling a credit card affects your credit
If you’re thinking of canceling your balance transfer credit card, you should know about the temporary (but still important) impacts you could see on your credit score. First off, canceling a credit card will likely shorten the average length of your credit history, which could cause your score to drop. More importantly, closing a credit card can have a major impact on your credit utilization—or the amount of debt you have in relation to your credit limits. If you carry balances on other credit cards, closing an account could cause your overall utilization rate to increase, thus causing damage to your credit score.
Here’s an example:
Imagine you have two credit cards—a balance transfer credit card with a $0 balance and a $10,000 credit limit and a rewards credit card with a $5,000 balance and a $10,000 credit limit. At the moment, your utilization rate is 25 percent since you owe a total of $5,000 across total credit limits of $20,000.
If you cancel your balance transfer credit card, your utilization rate will rise to 50 percent overnight since you would be left owing $5,000 on your one card with a $10,000 limit.
If you’re entirely debt-free, on the other hand, you won’t have to worry about your utilization rate climbing since it’s already at 0 percent.
Which cards offer more than just intro APR balance transfers?
If you haven’t signed up for a balance transfer credit card yet and you’re just considering it, you might want to focus on cards that offer excellent balance transfer terms along with other perks. For example, the Citi® Double Cash Card offers 0 percent APR on balance transfers for 18 months, followed by a variable APR of 13.99 percent to 23.99 percent. There’s no annual fee, yet you can also earn an unlimited 2 percent back on everything you buy — 1 percent when you make a purchase and another 1 percent when you pay it off.
Also, consider the Bank of America® Cash Rewards credit card, which lets you secure 0 percent APR on purchases and balance transfers made within 60 days of account opening for a period of 12 billing cycles, followed by a variable APR of 13.99 percent to 23.99 percent. This card also comes with no annual fee, and you can earn 3 percent cash back in a category of your choosing (options include gas, online shopping, dining, travel, drugstores, or home improvement and furnishings), 2 percent back at grocery stores and wholesale clubs and 1 percent back on other purchases. Note that 3 percent and 2 percent bonus categories are offered on combined spending of $2,500 per quarter, after which you’ll earn 1 percent back.
Better yet, this card offers a $200 cash bonus when you spend $1,000 on purchases within 90 days of account opening.
The bottom line
Canceling a balance transfer card may cause a temporary negative impact on your credit score, but it won’t derail your credit over the long haul. Then again, you can easily just keep your old balance transfer credit card open in order to lengthen your credit history and stabilize your utilization rate.
What happens after a balance transfer is really up to you, but you should make sure your decision is an informed one. Also, make sure that if you close your balance transfer card, you consider other credit cards with rewards and cardholder perks you can use.