5 mistakes you should avoid after paying off credit card debt

You’ve worked hard and have paid hundreds of dollars extra each month to chip away at the credit card debt you ran up. Now you’ve paid it off. It’s time to celebrate, right?

Sure. 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 credit card debt. It’s far too easy to start running up those cards again – or hurt your credit as you try to stay away from them.

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

1. Building up card debt again

Even after paying off debt, too many consumers simply build their credit card debt back up again, said William Frazier, owner of debt counseling service Clean Slate Credit.

While paying off your credit card debt is a positive step, Frazier points out that this work won’t amount to much if you don’t also change your spending habits.

“People think they’ll use their cards better now that they’ve paid off their debts,” Frazier said. “But then they start making just the minimum payments like they did before. They fall into the same trap.”

2. Ditching the benefits of a cash lifestyle

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

Sticking to these promises, though, can prove challenging.

Too many clients never learn how to live that cash-based life, said Xavier Epps, chief executive officer and founder of XNE Financial Advising.

“I’ve worked with clients who were extremely aggressive in paying off their debt, eliminating their debt in 18 or 24 months,” Epps said. “They paid off tens of thousands of dollars in this time. What they forget is that after that is done, there is another step: It’s time to learn how to live on a cash basis.”

Sometimes clients overcharge credit cards to accumulate rewards points or free airline miles, Epps said. Others simply don’t want to wait to purchase that new flat-screen TV or laptop until they have enough cash to buy it.

3. Not building an emergency fund

Financial experts recommend that everyone build an emergency fund, a source of cash that you can access to pay for unexpected emergencies without having to rely on credit cards – everything from a blown transmission on your car to a busted furnace in your basement.

Ideally, you’ll end up with an emergency fund that could cover daily living expenses for six months to a year.

Building an emergency fund should be easier for people who’ve paid down a significant amount of credit card debt, according to Liran Amrany, founder and chief executive officer of Debitize, a service that helps consumers use credit cards as if they were debit cards. Unfortunately, he said, that is often not the case.

“If they can devote an extra $500 a month to paying off their credit cards, why can’t they do the same with building an emergency fund?” Amrany asked. “They are missing an opportunity.”

And then 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 built up their savings.

4. Vowing to never use credit again

Misusing a credit card leads to plenty of financial pain. Using a credit card properly, though, is a smart financial move.

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

This is a mistake, Amrany said. Using a credit card to make purchases and then paying the balance off in full and on time each month is one of the best ways to rebuild a weak credit score.

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

But those consumers who never again use their credit cards miss out on the best way to boost their scores, Amrany said.

“The pendulum swings too far in the other direction for them,” Amrany 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 they’ve paid it off. True, this will prevent these people from building up credit card debt on those cards. But it also hurts their credit score.

That’s because closing a card will increase your credit utilization. This is the amount you have borrowed compared to your credit limits, and it’s the second most important factor in credit scoring calculations (after making on-time payments).

Basically, the more of your available credit you use, the bigger the negative impact on your credit score. If you close a credit card, you are instantly lowering the credit available to you. And if you still have debt on other cards, you are now instantly using up more of your available credit, even if you don’t make any future purchases.

Which 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 could see your credit score dip.

Frazier recommends that you keep your credit card open, even if you don’t plan on using those cards again.

“The card is like a hammer,” Frazier said. “You might hit your thumb 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 properly, you won’t have issues. Getting rid of a card isn’t the solution to spending problems.”

Bottom line

You’ve paid off credit card debt – congratulations! Don’t undermine your progress by falling back into bad habits, or falling out of the credit landscape altogether. If you know you have your spending under control, continue to use your credit card for your everyday expenses and pay it off in full each month. If you don’t trust yourself to keep credit cards in your wallet, avoid canceling your card, as this will damage your credit score even more. Set your card up to make a small recurring payment each month, like a subscription, and enroll in autopay to pay your credit card bill each month. This way you can start to reap the benefits of responsible credit card usage, without spiraling back into credit card debt.