5 mistakes to avoid after paying off credit card debt

You worked hard and paid hundreds of dollars extra each month to pay off the credit card debt you had accumulated. Now you’ve paid off. Time to celebrate, right?

Certainly. But it’s also time to be careful.

You don’t want to fall into some of the common traps that consumers make after paying off their credit card debt. It’s too easy to start using these cards again or damage your credit by trying to stay away from them.

Here are five mistakes to avoid if you want to keep those cards at zero every month while maintaining a healthy credit profile.

1. Accumulate card debt again

Even after debt is paid off, too many consumers simply pile on credit card debt again, says William Fraser, owner of debt counseling service Clean Slate Credit.

While paying off credit card debt is a positive step, Frazier notes that this work won’t make much of a difference unless you also change your spending habits.

“People think that now that they have paid off their debts, they will use their cards better,” Frazier said. “But then they start paying only the minimum payments like they used to. They fall into the same trap.”

2. Denying the benefits of a cash lifestyle

Many people promise to live a cash-based lifestyle after they pay off their credit card debt. They decide to buy goods only when they can afford to pay for them in cash. Or they promise that they will only charge you for items if they know they can pay off their credit card balances in full at the end of each billing cycle.

However, keeping those promises can be challenging.

According to Xavier Epps, CEO and founder of XNE Financial Advising, too many clients never learn to live this kind of cash-based life.

“I have worked with clients who have been extremely aggressive in paying off their debt, liquidating their debt within 18 or 24 months,” Epps said. “During this time they have paid tens of thousands of dollars. They forget that once that’s done, there’s one more step: it’s time to learn how to live on a cash basis.”

Epps says customers sometimes inflate their credit cards to earn reward points or free air miles. Others simply don’t want to wait to buy a new flat screen TV or laptop until they have enough money to buy one.

3. Do not create a reserve fund

Financial experts recommend that everyone create an emergency fund, a source of cash you can access to pay for unforeseen emergencies without relying on credit cards—from a blown transmission in your car to a burnt stove in your basement.

Ideally, you should have an emergency fund that can cover daily living expenses for six months or a year.

Building an emergency fund should be easier for people who have paid off a significant amount of credit card debt, according to Liran Amrani, founder and CEO of Debitize, a service that helps consumers use credit cards as if they were debit cards. Unfortunately, he says, this is often not the case.

“If they can set aside an extra $500 a month to pay off their credit cards, why can’t they do the same with an emergency fund?” Amrani asked. “They’re missing out.”

And when these people need thousands of dollars to pay for a new water heater? They turn to their credit cards again because they haven’t accumulated their savings.

4. Promise never to use the loan again

Misusing a credit card leads to a lot of financial problems. However, proper use of a credit card is a smart financial move.

Too often, consumers who have spent a year or more paying off credit card debt vow never to use credit cards again.

This is a mistake, Amrani said. Using a credit card to make purchases and then paying off the balance in full and on time every month is one of the best ways to repair a weak credit history.

And this is important for consumers who have just paid off a large amount of credit card debt. Since too much card debt can cause your credit score to drop, rebuilding your credit should be a priority.

But those consumers who never use their credit cards again are missing out on a better way to boost their scores, Amrani said.

“The pendulum has swung too far the other way for them,” Amrani said. “The fastest way to improve your score is to use your credit card responsibly.”

5. Closing your credit card accounts

Another big mistake? Too many people immediately close a credit card after paying it off. True, this will prevent these people from accumulating credit card debt on these cards. But it also hurts their credit score.

This is because closing the card will increase your credit usage. This is the amount you have borrowed compared to your credit limit and is the second most important factor in credit scoring calculations (after timely payments).

Essentially, the more available credit you use, the greater the negative impact on your credit score. If you close your credit card, you instantly reduce your available credit. And if you still have debts on other cards, you will instantly use up more available credit, even if you do not make any purchases in the future.

The card you close can also hurt your credit score. A longer credit history helps strengthen your credit score. If you close your oldest card, or one of your oldest, you may see your credit score drop.

Fraser recommends keeping your credit card open, even if you don’t plan to use it again.

“The map is like a hammer,” Frazier said. “You can hit your finger with a hammer. But if you use it right, it’s a useful tool. It’s the same with your credit cards. If you use them correctly, you won’t have any problems. Getting rid of the card is not the solution to spending problems.”

bottom line

You’ve paid off your credit card debt – congratulations! Don’t undermine your progress by falling back into bad habits or dropping out of the credit environment altogether. If you know you’re in control of your spending, continue to use your credit card for day-to-day expenses and pay it in full each month. If you don’t trust yourself to keep credit cards in your wallet, don’t cancel your card as this will further damage your credit history. Set up your card to make a small recurring payment every month, like a subscription, and sign up for Auto Pay to pay your credit card bill every month. This way, you can start reaping the rewards of responsible credit card use without going back into credit card debt.