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It’s best to keep credit cards open. But if you need to close one, first consider how it might impact your credit score.
Most Americans have more than one credit card. In fact, a recent study found the national average is three credit cards per person.
If you’re one of the average multiple credit card holders, this doesn’t necessarily mean you’re using each card consistently each month. You might even have one or two credit cards you’re not using at all. Should you close those unused credit cards?
In most cases, you’ll want to keep your credit card account open for as long as possible since it contributes to your credit score. However, this isn’t always possible or ideal, depending on your situation.
Here’s what you need to know about closing a credit card and whether it’s the best option for you and your credit score.
What Does It Mean to Close a Credit Card?
Closing a credit card means that you cancel the account and will no longer be able to use the card for purchases. Your credit limit goes away, as well as any requirements to make a minimum monthly payment. Before closing a credit card, you’ll need to pay off any remaining balance down to $0.
If you’ve earned reward points through your credit card, you may want to check with your credit card issuer to see if you can transfer those points. Otherwise you should use them up first. You can close your credit card by calling your card issuer (using the number on the back of your credit card) or filling out a cancellation form. If you have a secured credit card, you might be able to get your security deposit back when you close your card.
Once your credit card account is officially closed, you’ll want to destroy your credit card by cutting it up since it can no longer be used.
How Closing an Unused Credit Card Affects Your Credit
It might sound reasonable to close a credit card when you’re not using it. The major downside is that doing so could negatively impact your credit.
Limits your payment history
Credit cards are some of the best tools to help you build your credit score since they provide you with a recurring line of credit to build a long-term payment history.
Credit scores are based on a few factors and length of credit history is one of them. Both VantageScore and FICO® Score calculate a higher credit score when you have a longer credit history. When you close a credit card, the payment history you developed with that card is removed from your credit report after some time.
The payment history may not be removed immediately after the card is closed, but it will not stay on your credit report long-term, so you may see your credit score change as a result of this.
Let’s say you got your first credit card five years ago. Then, you added a second and third card two years ago. If you cancel your oldest account, you’ll eventually lose that five years of payment history and your payment history will only reflect your two most recent cards.
Yes, you can always replace the card you closed and open a new card, but a new account will shorten your credit length overall. If you do this often, your average credit history might never be longer than a few years,
Potential to raise your credit utilization
Another way that closing your credit card could impact your credit is by decreasing your overall credit utilization or ‘spending power’ with credit cards. As a general rule of thumb, it’s best to keep your credit utilization ratio below 30% of your total available credit limit. This means your credit card balance shouldn’t exceed 30% of your total credit limit.
However, when you close a credit card it lowers your total credit limit and could raise your utilization rate. Keeping more cards open and maintaining a low or no balance on each of them could keep your utilization rate much lower than 30% which is excellent for increasing your credit score.
When To Consider Canceling a Credit Card
While closing a credit card is generally not the best idea, there are some instances where it might seem beneficial to your situation. Let’s say you have a habit of overspending and feel you have too many cards open anyway.
If you’re finding it hard to make credit card payments on time and lower your balances, your credit score could already be taking a hit. Canceling a credit card and removing that temptation to spend or get into credit card debt could help you free up more money in your budget to pay bills and manage your finances better.
In this case, it would be best to cancel a credit card that you opened more recently and hold onto the oldest credit card to maintain a lengthy average age of your accounts.
On the other hand, sometimes one of your first credit cards may be the one you want to get rid of. Maybe, you started with a secured credit card or an unsecured card with high fees and not-the-best terms. If you initially opened a credit card with a high annual fee or other unfavorable terms, the only way to get rid of the card may be to close it.
If a credit card is causing you hassle, it might be worth it to risk losing the credit history and just closing the card.
Pros and Cons of Closing a Credit Card
If you can help it, try to avoid canceling your credit card especially if you want to build or keep a higher credit score. Instead, use any of these three alternative methods to keep your credit card account open to keep access to that credit line if you ever need it in the future.
1. Pay a small bill with your credit card each month
If you have a credit card that you’re not using, consider changing this by paying a small bill such as your car insurance, phone bill, or a streaming service subscription with the card. Set up automatic payments so you don’t have to actively think about paying the card.
By doing this, you’ll continue building positive payment history and keeping your credit utilization very low.
2. Ask to waive the annual fee
Some credit cards come with an annual fee which can be inconvenient to pay year after year — especially if you aren’t using the card often. Call your creditor and ask to waive your annual fee. They may be willing to do this if it means you’ll keep the card open longer.
Also, try to consider benefits or rewards that you may get to justify the annual fee. For example, some travel cards offer free bonus points each year or a free nightly stay at a hotel of your choice. This, along with other benefits or perks could make paying the annual fee worth it.
3. Set a reminder to use your card periodically
Some card issuers will actually close your credit card for you if it’s not being used anymore. Usually, the card is considered inactive if no purchase has been made in the past 12 months but each card issuer is different.
To avoid having your card closed without your knowledge, set a reminder to use the card occasionally. This could be once a quarter, twice a year, or just once every 12 months. Write down how many credit cards you have and how long you’ve had them for.
Then, set a calendar alert for the card(s) you’re not using often. This will remind you to make a small or timely purchase periodically to keep
Should You Cancel an Unused Credit Card?
Canceling an unused credit card shouldn’t do too much damage to your credit score if you’ve been making payments on-time and keeping balances low overall.
However, if you close too many older credit cards, your payment history will always be shortened and creditors won’t see any long-term account history to reference when you apply for a loan. Also, if you’re planning on switching lenders and refinancing a loan in the near future, you may not want to close any accounts right away that could alter your credit score.
Keep in mind that other types of accounts contribute to your credit score as well including personal loans, auto loans, mortgages, and student loans. If you have other accounts that have been open for several years, the fact that you close one credit card might not have much of a negative impact on your score if you’re trying to maintain good credit.
Choose wisely when you’re opening and closing credit card accounts and carefully consider how the choice will impact your own personal credit rating and future goals.