Is it better to cancel or not use a credit card?

Should You Cancel or Keep Unused Credit Cards?

When it comes to managing your finances, the question of whether to cancel or keep unused credit cards is a common one. While it may seem logical to eliminate inactive accounts, maintaining unused credit cards can often provide surprising benefits.

Maintaining Unused Credit Cards for Credit Health

• Longer Credit History: Unused credit cards contribute to your credit history, improving your overall credit score. The age of your credit accounts is a significant factor in determining your creditworthiness. Keeping old accounts open, even if inactive, helps maintain a longer credit history.
• Lower Credit Utilization: Credit utilization is the amount of credit you're using compared to your available credit limits. Low credit utilization demonstrates responsible credit management and helps keep your credit score high. By keeping unused credit cards open, you increase your available credit, which lowers your overall credit utilization ratio.

Inactivity vs. Cancellation

While it's beneficial to maintain unused credit cards for their positive impact on your credit score, it's important to avoid inactivity on these accounts. Making occasional small purchases or setting up automatic payments for small recurring bills can prevent your account from becoming dormant. Dormant accounts may eventually be closed by the issuer, which could harm your credit score.

Risks of Closing Unused Accounts

Closing unused credit card accounts can negatively affect your credit score in several ways:

• Shorter Credit History: Closing an old account reduces the average age of your credit accounts, which can lower your credit score.
• Higher Credit Utilization: Closing an unused credit card reduces your available credit, which can increase your credit utilization ratio if your credit usage remains the same.
• Negative Reporting: Some credit card issuers may report account closures to credit bureaus, which can have a negative impact on your credit score.

Conclusion

Contrary to popular belief, maintaining unused credit cards can be advantageous for your credit health. By keeping these accounts open and avoiding inactivity, you can benefit from a longer credit history and lower credit utilization ratio. However, it's essential to strike a balance between inactivity and closure. Occasional use or automatic payments are recommended to prevent dormant accounts from being closed and harming your credit score.