Should You Close a Credit Card You Don’t Use? A Pro’s Perspective

The million-dollar question, isn’t it? Should you close that dusty credit card you haven’t touched in years? The short answer is: it depends, but leaning towards probably not. Now, before you go sharpening your scissors to sever ties with that plastic relic, let’s dive deep into the complex ecosystem of credit scores, spending habits, and the surprisingly sticky web of financial implications. Closing a credit card is rarely a black-and-white decision, so let’s unpack the nuances.

The Credit Score Conundrum: Utilization, Age, and History

Your credit score, that elusive three-digit number that dictates so much of your financial life, is heavily influenced by several factors. Closing a credit card can inadvertently disrupt these factors, sometimes with negative consequences.

Credit Utilization Ratio: A Double-Edged Sword

Credit utilization ratio (CUR) is a crucial component of your credit score. It represents the amount of credit you’re using compared to your total available credit. Ideally, you want to keep this below 30%, and ideally closer to 10%. Closing a credit card reduces your overall available credit, potentially increasing your CUR even if your spending habits remain the same.

Imagine you have two credit cards: one with a $5,000 limit and another with a $2,000 limit. You consistently carry a balance of $1,000. Your CUR is currently 14.3% ($1,000/$7,000). If you close the $2,000 card, your available credit drops to $5,000, and your CUR jumps to 20% ($1,000/$5,000). While still under 30%, that increase can negatively impact your credit score, however slightly.

Age of Accounts: Wisdom Comes with Time

The age of your credit accounts is another vital factor. Closing older accounts, even if unused, can shorten your credit history, which can negatively affect your score. Lenders like to see a long and established track record of responsible credit management. That old card you opened in college? It’s like a seasoned veteran on your credit team, contributing to its overall strength.

Payment History: Don’t Break the Chain

While the specific card you’re considering closing might be inactive, its payment history contributes to your overall credit history. A card with a perfect payment history, even if dormant, reinforces your reputation as a reliable borrower. Removing it removes that positive data point.

The Cardholder’s Perspective: Why You Might Want to Close It

Despite the potential downsides, there are legitimate reasons to consider closing a credit card.

Annual Fees: A Costly Burden

Perhaps the most compelling reason is annual fees. Paying for a card you don’t use is like paying rent on an empty apartment. If the benefits of the card (rewards, perks, etc.) don’t outweigh the annual fee, it’s a clear waste of money. Call the card issuer and see if you can downgrade to a no-annual-fee version of the card. This will keep the credit line active without the added expense.

Temptation and Overspending: Fighting the Urge

For some individuals, unused credit cards represent a temptation to overspend. If you struggle with impulse purchases or find yourself dipping into credit when you shouldn’t, closing the card might be a necessary step to maintain financial discipline.

Security Risks: A Potential Liability

An unused card is still vulnerable to fraud. While card issuers offer fraud protection, the inconvenience and potential headaches associated with identity theft are something to consider. If you’re not actively monitoring the card, fraudulent activity might go unnoticed for longer.

Alternatives to Closing: Keeping Your Options Open

Before taking the drastic step of closing a card, consider these alternatives:

• Downgrade: As mentioned above, inquire about downgrading to a no-annual-fee version of the card.
• Set up Small, Recurring Purchases: Use the card for a small, automatic monthly purchase (like a streaming service) and set up automatic payments. This keeps the card active and helps maintain a positive payment history.
• Freeze the Card: Some card issuers allow you to temporarily “freeze” your card, preventing new charges while keeping the account open.

The Final Verdict: Weighing the Pros and Cons

Ultimately, the decision to close a credit card depends on your individual circumstances.

• If you have a low credit score or a short credit history, closing a card could be detrimental.
• If you carry high balances on other cards, closing a card will likely increase your credit utilization ratio and harm your score.
• If you’re paying a significant annual fee for a card you don’t use, closing it (or downgrading) might be the best option.
• If you’re prone to overspending, closing the card could improve your financial discipline.

Carefully consider these factors and weigh the potential benefits against the potential risks before making a decision.

Frequently Asked Questions (FAQs)

Here are 12 frequently asked questions to further clarify the topic:

1. Will closing a credit card immediately hurt my credit score?

The impact is not always immediate, but it’s highly probable that it will. The extent of the damage depends on your overall credit profile, especially your credit utilization ratio and the age of your credit accounts. Expect to see a minor drop in your score.

2. How long does it take for a closed credit card to disappear from my credit report?

Closed accounts typically remain on your credit report for up to 10 years, especially those with a positive payment history. Negative information, such as missed payments, can stay on your report for up to 7 years.

3. Is it better to cancel a credit card or just leave it unused?

In most cases, it’s better to leave it unused (with a small recurring charge) rather than cancelling it, especially if it’s an old card or has a high credit limit. This helps maintain your credit utilization and credit history. However, if there’s an annual fee, cancellation or downgrading is preferable.

4. Will closing a store credit card affect my credit score differently than closing a major credit card (Visa, Mastercard, etc.)?

The impact is generally the same. All credit cards, regardless of the issuer, contribute to your credit score. However, store cards often have lower credit limits, so closing one might have a less significant impact on your overall credit utilization ratio.

5. How can I avoid having my credit card closed by the issuer due to inactivity?

Use the card for a small purchase every few months. This shows the issuer that the account is active and reduces the risk of closure due to inactivity. Also, make sure your contact information with the issuer is up-to-date.

6. If I have multiple credit cards, which one should I close first?

Close the newest card with the lowest credit limit and an annual fee, if applicable. This will have the least impact on your credit utilization ratio and credit history.

7. Can I reopen a closed credit card account?

Sometimes, but not always. It depends on the card issuer and the reason for closure. If the account was closed due to inactivity, you might have a better chance of reopening it. However, if it was closed due to non-payment or fraudulent activity, reopening is unlikely.

8. Does closing a credit card affect my credit score more if I have a short credit history?

Yes, it does. A shorter credit history means that each account has a greater impact on your overall credit profile. Closing a card reduces your available credit and shortens your credit history, both of which can negatively affect your score.

9. If I transfer the credit limit from one card to another before closing the first card, will that help my credit score?

Yes, potentially. Transferring the credit limit increases the available credit on the remaining card, which can help maintain your credit utilization ratio. However, ensure the card you’re transferring the limit to doesn’t have an annual fee, and that you’re comfortable managing the increased limit.

10. What if I suspect fraudulent activity on a credit card I don’t use? Should I close it immediately?

Yes, report the fraudulent activity immediately and consider closing the card. While fraud protection is available, it’s best to minimize the risk of further unauthorized charges. However, discuss the closing implications with the card issuer first, as it might impact the fraud investigation.

11. How often should I review my credit report for unused credit cards?

You should review your credit report at least once a year. This helps you identify any inaccuracies, including unauthorized accounts or fraudulent activity. You can obtain a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) annually.

12. Are there any situations where closing a credit card is always the best option, regardless of my credit score?

Generally, if the annual fee far outweighs the benefits, and you can’t downgrade, it might be best to close the card, especially if you have other established credit lines. Also, if the card is consistently tempting you to overspend and hindering your financial goals, closing it could be a necessary step for your financial well-being, even if it has a slight negative impact on your credit score.