Is it bad to have a credit card I never use?

The Sleeping Giant: Is Your Unused Credit Card a Friend or Foe?

We all have them: accounts gathering digital dust, subscriptions we forgot we signed up for, and in the realm of personal finance, the often-overlooked unused credit card. Is this silent plastic rectangle a harmless relic or a potential problem lurking in your wallet? The answer, like most things financial, is nuanced.

On the surface, an unused credit card might seem pointless. It sits there, unburdened by debt, yet still demands a space in your life (and potentially your wallet). However, its presence, while inactive, can actually offer subtle but significant advantages to your credit health.

The primary benefit lies in its impact on your credit utilization ratio. This ratio, a crucial component of your credit score, represents the amount of credit you’re using compared to the total credit available to you. Having a credit card with a high credit limit, even if you never use it, significantly increases your total available credit. This, in turn, lowers your credit utilization ratio, a positive factor that can boost your credit score. Think of it like this: if your total available credit is $10,000 and you owe $1,000, your utilization is 10%. Adding an unused card with a $5,000 limit increases your available credit to $15,000, lowering your utilization to approximately 7%, a clear improvement.

However, this potential benefit comes with caveats. Many credit cards carry annual fees. If your unused card comes with a hefty annual fee outweighing the potential credit score improvement, it’s arguably detrimental to keep it open. The cost of the annual fee might negate the positive impact on your credit score, making it a financially unwise decision.

Furthermore, prolonged inactivity can lead to account closure. Credit card companies, aiming for efficiency, may close accounts deemed inactive after a certain period. This sudden closure can negatively impact your credit history, potentially lowering your credit score, undoing any benefits accrued from having the card in the first place.

So, what’s the verdict? An unused credit card isn’t inherently bad, but it’s not automatically good either. The decision to keep it open hinges on a careful cost-benefit analysis. Consider the annual fee, the credit limit, and the potential impact on your credit utilization ratio. If the annual fee is minimal and the credit limit substantial, the benefits likely outweigh the drawbacks. However, if the annual fee is high or you’re concerned about potential account closure, it might be wiser to close the account, carefully weighing the short-term impact on your credit utilization against the long-term savings. Regularly reviewing your credit report and statements can help you make informed decisions about managing your credit accounts, including those gathering dust in your wallet.