Should I close an unused line of credit?

Should I Close an Unused Line of Credit?

In the realm of credit management, the question of whether to close an unused line of credit often arises. While it may seem tempting to eliminate unnecessary accounts, there are potential consequences to consider before taking such action.

The Impact on Your Credit Score

Maintaining open credit lines, even those that remain unused, generally benefits your credit score. Lenders assess your creditworthiness based on various factors, including the length of your credit history, the number of open accounts, and your utilization ratio.

By keeping unused credit lines open, you:

• Lengthen your credit history: Open accounts boost the average age of your credit accounts, which is a key factor in determining your score.
• Increase your available credit: Unused credit lines increase your overall credit limit, thereby lowering your utilization ratio. A lower utilization ratio indicates that you're not using too much of your available credit, which can improve your score.

Fees and Other Considerations

However, there are certain situations where closing an unused credit line may be advisable:

• Significant annual fees: If an inactive credit line incurs a high annual fee that you're unable to avoid, it may make sense to close it to save money.
• Identity theft: In cases where your identity has been compromised, it can be prudent to close unused credit lines to limit potential financial damage.
• Inactivity: If you have a credit line that you never use and plan to keep inactive indefinitely, it may not be necessary to maintain it.

The Potential Risks of Closure

Closing an unused credit line can have negative consequences for your credit score, especially if you have few other open accounts. When you close a credit line, the following can occur:

• Shortening of credit history: Closing an account reduces the average age of your credit accounts, which can lower your score.
• Decrease in available credit: The closure of a credit line lowers your overall credit limit, which can increase your utilization ratio and potentially hurt your score.

Conclusion

In most cases, it is advisable to keep unused credit lines open unless significant, unavoidable fees are involved. The minor inconvenience of having an inactive card far outweighs the potential credit score damage that can result from closure. By maintaining open accounts, you can benefit from a longer credit history, increased available credit, and a potentially improved credit score.