Heidi emails: I have a credit card with a small limit that I got to help buy a house and improve credit. I've had it about 2 years and now own a home (so it helped). I currently owe nothing on it. Should I keep it or close it?
Practically speaking, there’s little upside or downside to keeping the card open. The answer to your question, like so many financial matters, may boil down to what just feels right.
The main benefit to keeping the card open is that it provides access to a little bit of extra credit in case of an emergency. But also consider if the card charges you an annual fee. If that is the case, you’ll have to decide if it’s worth it to keep it active. My guess is it’s probably not.
If you choose to close the account, you don’t have to worry about it lowering your credit score. Shutting off a major credit card with a large credit limit does typically hurt your debt-to-credit ratio, leading to a drop in your overall score. But because this particular card has a low limit, you don’t have to be concerned, says to John Ulzheimer, credit expert at CreditSesame.com.
Bottom line: If there’s no fee and you’re indifferent about having access to that small line of credit, the right answer rests on the choice that best suits how you feel. Ulzheimer suggests you keep the card open unless “the temptation to use it is killing you and you just can't resist.”
Brooklyn emails: My husband and I have been extremely frugal. We live well below our means and, by doing so have paid off all debt except our house. We currently make double house payments (we bought a very cheap house we could easily afford), and want to bump up our payments to 3x the monthly rate. If we pay off our house in the next 3 years, will this kill us with taxes? The interest on the mortgage is one of the few things we are able to write off.
From a mathematical standpoint, unless your loan carries a high interest rate, it may not make sense to speed up your mortgage payments. It’s not just because you’ll miss out on the interest tax deduction. It’s because you could possibly earn a better return if you invested that extra money in the stock market instead. With mortgage rates in the 4% range today and historical stock market gains averaging 7% a year, it’s obvious where the better investment likely lies.
But that’s all in theory, of course, assuming historical market gains hold up. And you may not be interested in taking risks or basing your answer just on numbers.
If that’s the case, paying off your mortgage quickly has its advantages, practical and emotional. It means you can enjoy the benefits of higher cash flow earlier in life to better afford upcoming expenses, like a major home repair or college tuition. And there’s nothing quite like feeling extra financially secure. “Consider your personal preference and what in the end will make you feel comfortable,” says John Walsh, president of Total Mortgage Services. “Some individuals just feel more comfortable not having a mortgage.”
And, if you’re worried about losing the interest tax deduction, I suppose you could make up for it by donating more to charity!
Send Farnoosh your money questions on Twitter @Farnoosh or by emailing her FarnooshFinFit@yahoo.com.