Is It Better to Cancel Unused Credit Cards or Keep Them?
Should you keep or cancel unused credit cards? Uncover the nuanced effects on your credit and overall financial standing.
Deciding whether to keep or cancel an unused credit card depends on individual financial circumstances and goals. Understanding the various factors involved is important for an informed decision.
How Keeping Unused Credit Cards Affects Your Financial Profile
Keeping unused credit cards open can positively influence your credit score. A longer credit history benefits your score, as older accounts contribute to a greater average age of accounts. Even if dormant, a card’s age continues to be factored into this important credit scoring component.
Keeping cards open also impacts your credit utilization ratio, a major factor in credit scoring models (about 30% of your FICO score). By maintaining a high credit limit, you keep a larger pool of available credit, which helps keep your utilization ratio low, ideally below 30%. An unused card can also contribute to a diverse credit mix.
However, keeping unused cards presents practical considerations. Some carry annual fees, ranging from $50 to over $500, charged even if unused. There is also potential for fraud if details are compromised, especially without regular monitoring. Additionally, access to more available credit could tempt some individuals to overspend.
How Cancelling Unused Credit Cards Affects Your Financial Profile
Cancelling an unused credit card can have negative and positive implications. A primary negative effect relates to your credit utilization ratio. Closing a card decreases your total available credit, which can increase your utilization ratio and potentially lower your credit score. This impact is particularly pronounced if the cancelled card had a high credit limit or if you carry balances on your remaining cards.
The length of your credit history can also be affected by cancelling accounts. While closed accounts generally remain on your credit report for 7 to 10 years, closing a very old account could eventually shorten your overall credit history. This factor accounts for 15% of your FICO score. Closing your oldest credit card is generally not advisable for credit score optimization.
On the positive side, cancelling an unused card eliminates annual fees, a direct financial saving. It also simplifies financial management by reducing accounts to monitor. For those who struggle with overspending, removing the temptation of available credit can be a beneficial step toward better financial discipline.
Key Considerations for Your Choice
When deciding whether to keep or cancel an unused credit card, consider several factors. The age of the account is significant; older accounts contribute positively to your credit history length, so retaining them is recommended. Closing an oldest account could have a noticeable impact on your average age of accounts over time.
The credit limit of the unused card also plays a crucial role. Cancelling a card with a high credit limit can substantially increase your overall credit utilization ratio, especially if you have balances on other cards. This increase in utilization can negatively affect your credit score. Conversely, if the card has a low limit and you have many other credit lines, its impact on your utilization might be less significant.
Annual fees should strongly influence your decision. If an unused card charges an annual fee, ranging from $50 to over $500, weigh whether keeping it open, and its contribution to your credit score, justifies the recurring cost. Your current credit score and future financial goals are also important. If you have a lower credit score or are planning major credit applications, such as a mortgage or auto loan, exercise caution with account closures to avoid negative impact. Finally, assess your spending habits; if available credit is a temptation, closing the card might be beneficial.
Managing Unused Credit Cards Without Cancelling
If you retain unused credit cards, proactive strategies can mitigate downsides while preserving benefits. One option is to downgrade the card if it carries an annual fee. Many issuers allow converting a premium card to a no-annual-fee version within the same product family, which helps maintain your credit history without incurring recurring costs. This process typically keeps the account open and retains the credit line.
To prevent account closure due to inactivity, make occasional small purchases. A small transaction, such as buying coffee or gas, every six to twelve months, paid off immediately, keeps the account active. Alternatively, set up a small recurring bill, like a streaming service, to charge to the card and pay via autopay.
Secure the physical card to prevent unauthorized use, especially since it is not used regularly. Storing it safely reduces fraud risk. These steps leverage the advantages of keeping unused credit lines open, such as a longer credit history and lower credit utilization, without fees or potential closure.