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In this article:
- How Canceling Your Unused Credit Card Impacts Credit
- When It Makes Sense to Keep an Unused Credit Card
- The Bottom Line
In general, it's best to keep unused credit cards open so that you benefit from a longer average credit history and a larger amount of available credit. Credit scoring models reward you for having long-standing credit accounts, and for using only a small portion of your credit limit.
But there are some cases when closing a credit card account could make sense. If your unused card has a pricey annual fee, you're concerned about controlling your spending, or the account you want to close is relatively new, canceling may be a safer bet.
Here's what you need to know before cutting your credit cards loose.
How Canceling Your Unused Credit Card Impacts Credit
It might sound counterintuitive to keep a credit card account open if you're not using it. That's especially true if you believe closing an account will keep you from overspending—which is a sound impulse. But closing a credit card could negatively affect your credit score. Here's how:
Increased Credit Utilization
Your credit utilization rate is the amount of revolving debt you currently have compared to your total credit limit. The lower the rate, the better. That shows lenders you're not maxing out your cards, and you can be trusted to use credit responsibly if they extend it to you.
Getting rid of a credit account affects the amount of credit you have available. For instance, if you have a credit card with a $2,000 credit line and another with a $3,000 credit line, your total available credit is $5,000. If you currently have $1,000 in debt between the two cards, your credit utilization rate is 20%.
Say your $1,000 balance is on the card with the higher credit limit, and you decide to close the other. When you close the card with a $2,000 credit line, your available credit decreases to $3,000 total. With $1,000 in credit card debt, your utilization rate jumps to about 33%. Credit utilization accounts for 30% of your FICO® Score☉ , the most common score used by lenders, so this change can have a significant impact on your score.
Experts recommend keeping your credit utilization below 30% at all times, and the closer to zero, the better. Assess how closing an account would affect your credit utilization before doing so.
Decreased Average Age of Accounts
A less weighty factor in your credit score is your length of credit history, or how long you've been actively using credit. This accounts for 15% of your FICO® Score. Closing a credit card account—especially the oldest one—reduces the average age of your accounts.
In our example above, let's say you've had the card with the $2,000 limit for eight years and the one with the $3,000 limit for two years. Closing the card with the $2,000 limit means your only open credit card account would be two years old. Other accounts, such as student loans and auto loans, would still be factored in to the average age. But keeping your oldest account open is generally your best bet so you don't drastically, and inadvertently, shorten the length of your credit history.
When It Makes Sense to Keep an Unused Credit Card
Particularly if you're planning to apply for new credit soon—in the form of a mortgage or an auto loan, for instance—keeping unused credit cards open can help protect a good credit score.
Check your credit report to identify your oldest credit card account and plan, in most cases, to keep it open. That's also a smart idea when the card you're considering closing has a high credit limit and cancelling it would greatly reduce your amount of available credit.
If you're concerned about the temptation to spend, place the card in a space that's hard to access, such as a safe deposit box, and only make one card available for emergencies. You may want to consider using cash for most purchases but placing a single recurring charge on your credit card, such as your Netflix payment, and paying it off each month by automatic debit. That will help keep your credit utilization low, your payment history spotless and your credit score in good shape.
If you're truly unable to control your spending and closing the account seems like the only way to appropriately manage your finances, doing so could be worth the short-term credit impact. An unused card with a high annual fee that you can't afford is also generally safe to close, as is a newly opened account that you don't use. Cancelling it will have less of a negative impact on your credit score than closing an older account.
The Bottom Line
Keeping credit card accounts open for as long as possible is a smart strategy for building and maintaining good credit, especially if you're planning to take out a loan in the near future. Evaluate the age of the account and its credit limit before closing it, but take stock of your spending habits and any fees associated with the card too.
Every financial decision is a personal one; while keeping unused accounts open is generally best, you might find that closing one is the better choice for you.
