Is it better to cancel an unused credit card?

Should You Cancel That Unused Credit Card? Probably Not.

We all have them: those credit cards tucked away in a drawer, gathering dust. They represent past purchases, forgotten rewards programs, or perhaps a time when we needed a little extra credit. But the question remains: should you cancel these unused credit cards? The simple answer, in most cases, is no. While it might seem logical to declutter your financial life by closing inactive accounts, doing so can surprisingly harm your credit score.

The primary benefit of keeping unused credit cards open lies in their contribution to your credit history. Lenders look at the length of your credit history – the age of your oldest account and the average age of all your accounts – as a significant factor in determining your creditworthiness. Closing an old, unused card, even one with a zero balance, shortens your credit history, potentially lowering your score. This is particularly true if it’s one of your oldest accounts. Think of it like this: a long, consistent credit history demonstrates responsible financial behavior over time.

Furthermore, keeping unused cards open increases your available credit. This metric, known as your credit utilization ratio (the percentage of your available credit that you’re using), is a crucial element of your credit score. A low credit utilization ratio (ideally under 30%, but lower is better) signals to lenders that you manage your debt responsibly. Even if you don’t use a particular card, its available credit still contributes to lowering your overall utilization ratio. Canceling a card reduces your available credit, potentially increasing your utilization ratio even if your outstanding debt remains the same. This increase can negatively impact your score.

However, there are exceptions. If you have a card with an annual fee you’re not willing to pay, or a card associated with negative memories (e.g., a card used during a period of financial hardship), closing it might be worthwhile. Weigh the potential negative impact on your credit score against the financial burden or emotional distress associated with keeping the card.

Before canceling any card, consider contacting the issuer. They might offer to waive the annual fee or provide other incentives to keep the account open.

In conclusion, while the temptation to simplify your finances by canceling unused credit cards is understandable, it’s often a detrimental move. The long-term benefits of a longer credit history and a lower credit utilization ratio, both positively impacted by keeping those inactive accounts open, typically outweigh the minor inconvenience of having a few extra cards. Unless there’s a compelling reason to close an account, it’s generally wiser to keep those unused cards active and contribute to a healthier credit profile.