Should you cancel an unused credit card?

Deciding whether to keep or cancel an unused credit card involves more than tidying up your wallet. Important factors are at play — like how it might affect your credit score and overall financial well-being.

There are compelling reasons to keep those unused cards, but sometimes canceling is the better option. How you handle open credit accounts can affect your credit score and your ability to get other lines of credit.

How canceling your unused credit cards affects your credit score

While canceling a card may seem like a good way to simplify your finances or reduce the temptation to overspend, it can have unintended consequences for your credit score.

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Increased credit utilization

Canceling a credit card decreases your total amount of available credit. This leads to an increase in the total percentage of available credit you’re using, also known as your credit utilization ratio.

For example, if you have two credit cards with a total limit of $10,000 and a balance of $2,000, your credit utilization ratio is 20 percent. If you close one card with a $5,000 limit, your available credit drops to $5,000. As a result, your utilization ratio jumps to 40 percent, even though you haven’t taken on any additional debt.

Higher credit utilization can negatively affect your credit score, as it’s a significant factor in credit scoring models.

Average age of accounts

The length of your credit history makes up 15 percent of your credit score. Maintaining a longer credit history demonstrates to lenders that you have more experience managing credit and are, therefore, less of a risk.

Closing older accounts can lead to a score drop, especially if you decide to close the card you’ve had the longest. Even though closed accounts remain on your credit report for up to 10 years, they no longer contribute to the ongoing aging of your credit history.

When it makes sense to keep an unused credit card

In many cases, it’s a good idea to keep your current credit cards, even if you’re not using them.

You’re planning to apply for a mortgage

Since canceling a credit card can lower your credit score, doing so may impact the rate and terms a mortgage lender is willing to offer. If your credit score was already borderline, even a small drop could cause the lender to deny your mortgage application.

You’re new to building credit

If you’re new to building credit, keeping all accounts open can benefit your credit profile. An open, unused card helps establish a strong credit foundation by demonstrating your ability to manage available credit responsibly. It also provides a buffer for your credit utilization rate, making it easier to keep this ratio low.

For newcomers, showing consistent, responsible credit management can build a solid credit history more quickly.

There’s no annual fee

If your unused credit card has no annual fee, there’s little financial downside to leaving it open. This allows you to retain the account history and maintain lower utilization rates without incurring extra costs. The card can also serve as a financial safety net for unexpected expenses.

You may need access to credit in the future

Your credit needs may change over time. Keeping an unused card open allows you to access credit quickly without applying to get a new card. It also helps you avoid a hard inquiry, which can temporarily lower your credit score.

When to cancel an unused credit card

Despite the potential benefits of keeping an unused credit card, sometimes it makes sense to close your account. This includes:

• Difficulty managing multiple accounts: If you find managing multiple credit card accounts challenging, canceling an unused card can reduce stress and help you avoid missed payments.
• High annual fees: If your card has high annual fees, membership fees or other costs you can no longer justify, you may benefit from canceling it. Paying a fee for a card you don’t use creates an unnecessary expense.
• Struggles with responsible spending: If you need help with using credit cards responsibly, canceling unused cards can help you avoid potentially falling into unmanageable debt.

When looking to simplify your finances, remember that closing recently opened cards and those with low credit limits will likely have the smallest impact on your credit score.

Things to do before deciding to cancel an unused credit card

If you’re still leaning toward closing your unused credit card, take a few more steps to ensure you’re making an informed decision.

Review your credit history

Start by requesting a free copy of your credit report, which you can do online, over the phone or by mailing in a request form. Once you receive it, look at how long you’ve had each card. If the card you’re considering closing is one you’ve held for years, you may want to reconsider.

Look at your available credit

Evaluate your total available credit and how canceling the card will affect it. To maintain good credit, keep your credit utilization ratio below 30 percent. Make sure closing the card won’t push you into the danger zone.

Consider the big picture

Think about your overall financial situation and goals. If canceling the card simplifies your finances or helps you avoid fees and overspending, it might be worth the potential short-term impact on your credit score.

How to cancel an unused credit card

Canceling an unused credit card isn’t as simple as cutting it up. To ensure the process goes smoothly and doesn’t create potential issues down the line, it’s important to follow a few key steps.

1. Pay of the balance

Start by paying off any remaining balance on the card. While it is possible to cancel a credit card with an outstanding balance, it’s not recommended. You’ll still be responsible for making minimum payments and interest will still accrue.

If you can’t pay the card in full, consider freezing the account until you can close it.

2. Remove recurring charges

Review your credit card statements for any automatic charges or recurring payments tied to the card. Transfer them to another card or payment method to avoid missed payments and service interruptions after the card has been canceled.

3. Contact the issuer

Call the card issuer’s customer service number, confirm your balance is zero and request to close the account. Write down the name of the person you speak to and the date and time of the call.

4. Confirm cancelation

After requesting cancellation, ask for written confirmation that the account has been closed. This documentation may prove important if any issues arise in the future, such as additional charges or a dispute about the account’s status.

5. Destroy the card

Once you’ve confirmed the cancelation, destroy the physical card. Cutting it up or using a shredder prevents anyone from finding and fraudulently using the card.

Preventing involuntary card closure

Credit card companies sometimes close accounts due to inactivity. This can have the same impact as if you had closed the account. If you decide it’s in your best interest to keep an unused card, consider occasionally making charges and paying them off immediately.

Alternatively, you can use the card to pay a small monthly bill, such as your internet or phone bill, and set up automatic monthly payments. Continue monitoring your account to avoid any surprises.

The bottom line

Deciding whether to cancel an unused credit card is a personal decision that depends on your financial situation and goals. Keeping the card open can help maintain a healthy credit score by contributing to your credit history and utilization ratio. However, there are valid reasons to consider canceling, such as high annual fees or difficulties managing multiple accounts.

Now that you understand the pros and cons of canceling an unused credit card, you’re better equipped to evaluate how your current cards fit into your financial situation. Review your credit report, consider your financial goals and take the necessary steps to manage your credit responsibly. These steps will help you maintain a strong credit profile.

Frequently asked questions

• Do unused credit cards hurt your score?

  No, unused credit cards do not hurt your credit score. However, if the card has an outstanding balance, it’s critical to keep making payments on time, as late or missed payments can negatively impact your score.

• How many credit cards should I have?

  The “right” number of credit cards varies from one person to the next. It’s important to have enough credit to meet your financial needs and maintain a low credit utilization ratio, but not so many that you struggle to manage them responsibly. On average, two to five cards is considered manageable.

• Why is a good credit score important?

  Having good credit helps ensure you can secure loans, mortgages and credit cards with lower rates and favorable terms. It can also impact your insurance premiums and even your ability to rent an apartment or get a job. A strong credit score opens up more financial opportunities and can save you money.