Many of us have credit cards that we rarely use. Maybe you have an old student card with a low limit or a card that you got when your credit was not so good that carries a high-interest rate. If you’re not using these cards you might be tempted to close them.
Closing those cards could hurt your credit, so you will want to think carefully before making that decision. There are times when it does make sense to close an old card: if it carries a high annual fee, if you’re concerned that its details may have been compromised or if you just can’t stop spending on it. If you do decide to close cards you can take steps to reduce the impact of the closure on your credit.
Why Would Closing Credit Cards Hurt Your Credit?
Your credit score is supposed to reward responsible use of credit and closing credit cards may seem like a responsible thing to do. You can’t overspend on a closed account. So why would closing credit cards hurt your credit?
Credit scoring models rate your creditworthiness by assessing a number of factors. Two of these factors may be affected when you close a credit card:
- Your credit utilization is the percentage of your available credit that you use. Your overall credit utilization is the total of all your credit card balances as a percentage of your combined credit card limit. A low credit utilization rate is good for your credit, and many experts recommend keeping your credit utilization below 30%. Credit utilization is an important factor in computing your credit score.
Let’s say you have two credit cards, each with a limit of $5000. You have no balance on one card and a balance of $2000 on the other. Your combined limit is $10,000 and your combined balance is $2000, so your credit utilization is 20%, which is good. If you close the unused card, you have the same $2000 balance, but now your total limit is $5000, so your credit utilization is 40%, which is not so good. You haven’t spent any money or changed what you owe, but you have raised your credit utilization and you may have harmed your credit.
- The average age of your credit accounts also affects your credit. The length of your credit history is a factor that credit scoring models use in computing your score. A longer credit history means you’ve been using credit for a longer time, and that makes you a better credit risk. Closed accounts are still part of your credit history and will still have an impact on your credit, but credit scoring models typically give a higher weight to current account information. Closing an older account with a good payment history reduces the impact of a positive element on your credit record.
The extent of the impact on your credit will depend on your credit history. If you have an extensive credit history with many accounts, the impact may be minimal. If you have a thin credit file with only a few open accounts closing an account could drive a substantial drop in your credit.
When You Should (And Shouldn’t) Close a Credit Card
There are times when closing a credit card is a sensible decision. If you have a card that you’re not using much, look for these signs:
- The card has a high annual fee. A credit card you don’t use makes a positive contribution to your credit utilization and the length of your credit history, but that contribution may not be worth the money you lay out every year to keep the card.
- You don’t want the responsibility of monitoring the card statements for possible fraud. You should be checking every credit card statement every month for possible fraudulent charges even if you don’t use the card. If you don’t have the time or patience to keep track, consider closing the card.
- You have an extensive credit history with many open accounts. If you have an extensive credit file and a well-established credit history the impact of closing one card will probably be minor and temporary.
- The card you’re thinking of closing is one of your newer accounts. Maybe you got pre-approved, got the card on impulse or just decided that it was a temptation you don’t need. Either way a new account is not helping the length of your credit history, so there’s less reason to keep it.
- You can’t resist the temptation to use it. For some people an unused credit card is an irresistible incentive to spend more money. If you’re one of those people, consider closing the card. Closing a card may have less impact on your credit than running up new debts that you can’t afford to pay.
- You’re getting a divorce. If you have a joint credit card and divorce is imminent, pay that joint card off and close it. A joint credit card in a divorce situation can easily create serious problems.
There are also cards you shouldn’t close and times when you shouldn’t close a card. Look for these signs:
- The card you’re thinking of closing is your first card or a card you’ve had a long time. Many experts advise that you should never cancel your first card. The older a card is, the more it helps build the age of your credit history. If those old cards carry high-interest rates, low limits or other conditions from a time when you had less than good credit then consider asking the issuer to upgrade the terms.
- You have a thin credit file. If you have a short credit history with only a few accounts, closing one account may have a greater impact on your credit than it would for a person with a more extensive credit record. Closing a card could make it harder to get credit in the future.
- The card you’re thinking of closing has no fees. If a card is helping to lower your credit utilization and extend your credit history and it isn’t costing you anything, why close it?
- You are thinking of closing your only credit card. Unless you are convinced that you cannot manage a credit card, don’t close your only card. Having an open credit card account can make a significant difference in your credit and make it easier to get credit in the future.
- You are carrying high balances on the cards you are actively using. If your working cards have high balances, that card that you don’t use may be the only thing keeping your credit utilization down. Closing it could do damage to your credit. Consider leaving it open and focusing on paying off those balances.
You may find that you have reasons to close a card and reasons to keep it. You’ll have to weigh both the positive and negative consequences of closing a card before making a decision.
How to Close Credit Cards
If you do decide to close one or more of your accounts, you can minimize the impact on your credit history. Consider taking these steps:
- Don’t close accounts at the same time. If you want to close more than one account, space the closures out. That will reduce the impact on your credit.
- Consider a limit transfer. If you have more than one card from the same issuer, the issuer may be willing to transfer the limit of the card you’re closing to the card you’re keeping. That will help you keep your credit utilization rate low.
- Consider asking for a limit increase on the card (or cards) that you will retain. Even if your cards are from different issuers, you may be able to get a limit increase on the card or cards you are keeping. A higher credit limit will reduce the impact of the closure on your credit utilization.
- If your older cards have few favorable terms than your newer ones, consider requesting better terms. Your first card may be a secured card, or a student card or a card that you got when your credit was weak, and you didn’t qualify for good terms. Many card issuers will upgrade those accounts if your credit has improved. Getting better terms on your older accounts may make it easier to close newer ones. Be sure to ask your issuer to confirm that the upgrade will not be reported as a new account.
- Redeem any rewards that you have on the card you are closing and be sure the balance is zero. You don’t want to leave rewards on the table. Residual interest or an unpaid balance could be reported as a late or missed payment.
- Get confirmation in writing before destroying the card. Contact the issuer and get written confirmation that the card is closed at your request and the balance is zero. When the closure is confirmed, shred the card or destroy it completely.
Any time there’s a change in your credit accounts it’s a good idea to check your credit report after 90 days to be sure the change is correctly reported.
If You Choose to Keep a Card
You may wish to keep a credit card even if you don’t use it much, just to maintain the length of your credit history and keep your credit utilization low. If you decide to keep a card, remember these points:
- Don’t let the card become inactive. Many issuers will stop reporting an account if there’s no activity. Consider using your card for a single small recurring monthly expense, like a gym membership or Netflix subscription, and setting up automatic payments to make sure you don’t forget to pay it on time.
- Always read the statement. An inactive card is an identity thief’s dream come true. Credit cards have extensive protection against fraud, but the longer you wait to report the fraud the harder it is to unravel. You should monitor all active accounts, whether you use them or not.
An inactive card can help your credit, but it will still require some attention. Consider that before you choose to keep a card that you aren’t using.
Closing a credit card that you don’t use can hurt your credit; however, it may still be a good decision. Consider the overall impact on your finances before making a decision. Your credit matters, but it’s not the only consideration. If closing a card will help you stop running up debts, that closure will help your credit more than it hurts it in the long run!
If you do decide to close cards, think about managing the closures in a way that will minimize their impact on your credit. Consider raising your credit limits on your other accounts to keep your credit utilization low and be sure the closed card is completely paid off and properly reported.