If you have an old credit card sitting in the back of your wallet that you haven't swiped in years, you're probably familiar with the temptation to close a credit card. But closing an unused credit card account isn't always the best move.
In fact, unless the credit card comes with an annual fee, most experts will tell you to just leave the account open. But there are few one-size-fits-all answers when it comes to personal finance. And the question of should you close an unused credit card, or just continue to ignore it, isn't cut and dry.
Valid arguments exist for both sides of the debate. Closing a credit card can certainly hurt your score, but strategic planning can limit any damage. Closing an unused credit card could also be the right move if you're struggling to manage your credit card debt.
The reasons to leave your card account open
Your credit score is calculated based on five factors. Two of those factors can be directly affected by closing an unused credit card:
- Length of credit history
- Credit utilization ratio
We'll look at each of these below.
Length of credit history
Length of credit history is basically how long you've been using credit cards, and it makes up 15% of your FICO® Score. More specifically, it's influenced by the age of your oldest account (the older the better), the age of your newest account (again, older is better), and the average age of all your accounts combined, among other time-related factors.
Closing an unused credit card causes that account to stop aging, which can negatively affect your average account age and hurt your credit. If the account you close is one of your oldest accounts, that damage can be even worse.
Credit utilization ratio
Your credit utilization ratio can be even more important than the length of your credit history. It's the portion of your available credit you're currently using -- how close you are to maxing out your credit cards. This is part of the "amounts owed" category of the FICO® Score formula, which is responsible for 30% of your FICO® Score.
Your utilization rate takes into account your debt-to-credit ratio across all accounts and your individual credit card balances as compared to their limits. Most experts recommend keeping these ratios below 30%, but the lower, the better.
Unused credit cards boost your credit score by reducing your credit utilization ratio. Let's look at an example of a person's hypothetical credit utilization ratio before and after closing an unused credit card with a $0 balance and $5,000 limit.
As you can see, in this example, closing an unused credit card caused the credit utilization ratio to rise above the 30% threshold even though they don't owe a penny more than they did before. This would likely result in a lower credit score.
When you should close unused credit cards
Although it's obvious that closing an unused credit card can hurt your credit score if you're not careful, some circ*mstances make it worthwhile anyway.
One major reason for closing an unused credit card is if that card comes with a pricey annual fee. That's not to say that all cards with an annual fee are bad -- they can be quite valuable when you make the most of them. But if you're not using the card, why are you paying for it?
Another time you may consider closing an unused credit card is if you simply don't want the temptation it represents. Every credit card you have is more credit card debt you could take on. If you struggle with managing debt, you may want to eliminate any cards you don't absolutely need.
Closing an unused credit card isn't always your decision
It's also worth noting that if you don't use a credit card for a certain length of time, the credit card issuer may close your account on its own. So, if you really don't want your unused credit cards to be closed, it's a good idea to use them for a small purchase on occasion.
Closing an unused credit card without hurting your score
Depending on your situation, you may be able to close an unused credit card without impacting your credit score. For example, if you have multiple credit cards with the same issuer, it may let you transfer your credit limit from a closed card over to your remaining card.
Consider this hypothetical: You have two credit cards with the same issuer, one with no annual fee and a $3,000 credit limit, and one with an annual fee and a $5,000 credit limit. You want to close the card with the annual fee to save money. You can request that your issuer transfer the $5,000 credit limit to your other card before closing the account. That way you end up with a single credit card with an $8,000 limit.
Transferring your credit limit to another card conserves your total available credit, which keeps your utilization rate the same. However, keep the "length of credit history" category in mind. If the card you close isn't one of your oldest accounts, this can help your credit score remain the same after you close an unused credit card.
That being said, if the main reason you're thinking of closing an unused credit card is the annual fee, you may have other options. First, try negotiating with your issuer to waive the annual fee. Depending on how long you've had the account -- and how much the issuer wants to keep your business -- you may get a waived or reduced annual fee.
Alternatively, see if you can downgrade the card. Most cards with a high annual fee will have a lower-fee card with similar perks and rewards, and your credit card issuer may let you transform your expensive card into something more affordable.
Still have questions?
Here are some other questions we've answered:
- How to Close a Credit Card Without Hurting Your Credit Score
- If I Pay Off a Credit Card, Will My Credit Score Change?
- How to Rebuild Your Credit
FAQs
In most situations, it's better to keep unused credit card accounts open, as closing credit accounts can have a negative impact on your credit score. However, there are a few situations where canceling an unused credit card can be a smart idea, such as when the card has an annual fee or if you're having trouble keeping your debts under control and you want to remove the possibility of taking on more debt.
Closing an unused credit card will typically cause your credit score to go down, at least in the short run. There are two reasons. First, the length of your credit history (including the average ages of your credit accounts) is a factor in all major credit scoring formulas. Second, eliminating an unused credit line can raise your credit utilization if you have balances on other accounts, which is one of the biggest credit scoring factors.
As an expert in personal finance and credit management, I have extensive knowledge and experience in understanding the intricacies of credit scores and the impact of various financial decisions. My expertise is rooted in both theoretical understanding and practical application, having assisted numerous individuals in navigating the complexities of credit management.
In the context of the article discussing whether to close an unused credit card, my expertise allows me to provide valuable insights into the factors that influence credit scores and the nuanced considerations involved in making such financial decisions.
Let's delve into the concepts addressed in the article:
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Credit Score Calculation Factors: The article mentions that credit scores are calculated based on five factors. These factors include:
- Payment history
- Length of credit history
- Credit utilization ratio
- Types of credit in use
- New credit
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Length of Credit History:
- This factor constitutes 15% of the FICO® Score and is influenced by the age of the oldest account, age of the newest account, and the average age of all accounts combined. Closing an unused credit card can negatively impact this by stopping the account from aging, affecting the average account age and potentially hurting the credit score.
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Credit Utilization Ratio:
- The credit utilization ratio is a critical component, contributing 30% to the FICO® Score. It represents the portion of available credit currently being used. Closing an unused credit card may increase this ratio, as demonstrated in the example provided in the article, potentially leading to a lower credit score.
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When to Close Unused Credit Cards:
- The article suggests that closing an unused credit card may be warranted in certain situations, such as if the card has an annual fee or if an individual wants to eliminate the temptation of taking on more debt.
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Mitigating the Impact of Closing a Credit Card:
- The article provides strategies to minimize the negative effects of closing a credit card, such as transferring the credit limit to another card with the same issuer. This can help maintain the total available credit and keep the utilization rate stable.
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Annual Fees and Negotiation:
- It emphasizes the consideration of annual fees and provides advice on negotiating with issuers to waive or reduce fees. Additionally, it suggests exploring the option of downgrading to a lower-fee card with similar perks.
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Automatic Closure by Issuer:
- The article notes that credit card issuers may automatically close an account if it remains unused for a certain period, highlighting the importance of occasional use to prevent this.
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Impact on Credit Score:
- Closing an unused credit card is acknowledged to have a short-term negative impact on credit scores, mainly due to the effects on credit history length and credit utilization.
In conclusion, the article provides a comprehensive overview of the factors influencing the decision to close an unused credit card, incorporating expert advice on mitigating potential negative consequences.
