Is it better to close a credit card or let it go inactive?

Is it Better to Close a Credit Card or Let it Go Inactive?

Maintaining a healthy credit profile is crucial for financial well-being. One important factor influencing creditworthiness is the use of credit cards. The question arises whether it is better to close unused credit cards or let them remain open but inactive.

Benefits of Keeping Unused Credit Cards Open

• Preserves Credit History: Closing a credit card account reduces the available credit, potentially lowering the credit utilization ratio and negatively impacting the credit score. Keeping unused cards open maintains credit history, supporting a higher score.

• Lowers Credit Utilization Ratio: Credit utilization, the percentage of available credit currently used, is a significant factor in credit scoring. Inactive cards increase the overall available credit, reducing the utilization ratio. This improves the credit score, making it easier to qualify for loans and lower interest rates.

Drawbacks of Keeping Unused Credit Cards Open

• Annual Fees: Some credit cards charge an annual fee for maintaining the account. If the card is inactive, the fee may not be worth the benefit of preserving credit history.

• Security Concerns: Inactive credit cards can be an increased security risk. If the card number is stolen or compromised, it could lead to unauthorized purchases or identity theft.

• Temptation of Overspending: Having an unused credit card easily accessible may tempt some individuals to overspend, potentially damaging their credit.

Alternatives to Closing or Inactivating a Credit Card

• Use the Card Occasionally: Make small purchases or recurring payments on the unused card to maintain activity.

• Keep the Card in a Safe Place: If the card is not actively used, store it securely to minimize the risk of theft or unauthorized use.

Conclusion

For a robust credit history and healthy credit utilization, it is generally wiser to keep unused credit cards open rather than closing them. While there are some drawbacks to consider, such as annual fees and security concerns, the benefits of preserving credit history and improving credit utilization often outweigh these concerns. However, individuals should carefully weigh their options and consider their personal financial situation before making a decision.