Is it better to keep unused credit cards open?

The Dormant Card Dilemma: Should You Keep Unused Credit Cards Open?

The allure of cutting up a credit card you no longer use is strong. It feels like a tidy act of financial decluttering. But before you reach for the scissors, consider this: keeping those dormant cards open might actually be a surprisingly good move for your credit score. While it might seem counterintuitive, the dynamics of credit scoring models favor a certain degree of “unused potential,” rewarding responsible management and long-term financial stability.

The core of the argument rests on two key pillars of credit score calculation: credit history length and credit utilization ratio. Let’s break down why these matter in the context of unused credit cards.

The Power of Time: Length of Credit History

Think of your credit history like a financial resume. The longer and more consistently positive it is, the more comfortable lenders are with extending you credit. Closing an old credit card effectively deletes that card’s history from your credit report. This can shorten the average age of your accounts, potentially impacting your score negatively, particularly if it’s one of your older cards.

Even if you haven’t used the card in years, the fact that it’s been open and in good standing demonstrates responsible credit management over a longer period. This signals to lenders that you’re a stable and reliable borrower, even if you don’t actively need to borrow.

Unlocking Potential: Credit Utilization Ratio

Credit utilization, the percentage of your available credit that you’re actually using, is a crucial factor in determining your credit score. The general rule of thumb is to keep your utilization below 30%, and ideally below 10%. This is where those unused credit cards can become powerful allies.

Imagine you have two credit cards, each with a $1,000 limit. You consistently charge $200 to one card each month and pay it off in full. With only one card, your credit utilization is 20%. However, if you keep the second card open and unused, your total available credit doubles to $2,000. Suddenly, that $200 charge represents only 10% utilization. This lower utilization ratio can significantly boost your credit score.

Essentially, an unused credit card acts as a “safety net” for your credit utilization. It increases your overall available credit, allowing you to absorb unexpected expenses on other cards without drastically impacting your utilization percentage.

The Caveats: Weighing the Risks and Rewards

While keeping unused credit cards open can be beneficial, it’s not a universally applicable strategy. There are a few key considerations:

• Annual Fees: If the unused card charges an annual fee, the benefit to your credit score might not outweigh the cost. Consider contacting the issuer to see if they’ll waive the fee, downgrade the card to a fee-free option, or transfer your credit line to another existing card.
• Temptation to Overspend: If you’re prone to impulsive spending, having unused credit cards readily available might be a slippery slope. In this case, the potential benefits to your credit score might not be worth the risk of accumulating debt.
• Fraud Risk: Although credit card companies have robust fraud detection systems, keeping track of multiple accounts can be challenging. Regularly monitor your credit reports and account statements for any suspicious activity.
• Inactive Account Closure: Some card issuers may close accounts due to inactivity. To prevent this, consider putting a small, recurring charge (like a streaming subscription) on the card and setting up automatic payments.

The Verdict: A Thoughtful Approach is Key

Ultimately, the decision of whether to keep an unused credit card open depends on your individual financial circumstances and habits. If you’re disciplined, don’t carry a balance, and can manage multiple accounts responsibly, keeping unused credit cards open can be a valuable tool for boosting your credit score. Just be sure to weigh the potential benefits against the potential risks, and always prioritize responsible financial management. The goal isn’t just to have a good credit score; it’s to build a solid foundation for long-term financial well-being.