Does it hurt your credit to close unused credit cards?

The Unseen Consequences: Why Closing Unused Credit Cards Might Hurt Your Credit

We’ve all been there: staring at a stack of credit cards, wondering if it’s time to declutter. Maybe you opened that store card for a discount years ago and haven’t used it since. Or perhaps you’re simply trying to simplify your finances. Whatever the reason, the thought of closing unused credit cards is tempting. But before you reach for the scissors (or the phone), it’s crucial to understand the potential impact on your credit score.

While it seems counterintuitive, closing unused credit cards can actually hurt your credit. The reasoning lies in several key factors that contribute to your overall credit health. Here’s a breakdown:

The Age of Your Credit:

One of the most significant factors affecting your credit score is the age of your credit accounts. Credit bureaus like to see a history of responsible credit use over a long period. Older accounts, even if unused, demonstrate this history. Closing a long-standing credit card, especially one of your oldest, effectively shortens the average age of your credit accounts. This decrease in average age can lead to a dip in your credit score, as it signals a shorter track record of credit management.

Credit Utilization Ratio:

Another crucial factor is your credit utilization ratio – the amount of credit you’re using compared to your total available credit. Ideally, you want to keep this below 30%, and even lower is better. When you close a credit card, you reduce your total available credit. This can inadvertently increase your credit utilization ratio, especially if you carry balances on other cards.

For example, let’s say you have two credit cards:

• Card A: $5,000 credit limit with a $500 balance (10% utilization)
• Card B: $3,000 credit limit with no balance (unused)

Your total available credit is $8,000, and your overall utilization is $500/$8,000 = 6.25%.

Now, if you close Card B, your total available credit drops to $5,000. Your utilization ratio jumps to $500/$5,000 = 10%. While still relatively low, the increase demonstrates how closing a card can negatively impact this important metric.

The Closed Account’s Lingering Presence:

It’s important to note that a closed account will remain on your credit report for several years, typically around 7-10 years. During this time, it continues to contribute to your credit history. However, once closed, the positive contribution it provided – particularly its available credit and its history of responsible use (even if minimal) – ceases to exist in the calculation of your credit utilization and overall available credit.

So, What Should You Do?

Instead of closing unused credit cards, consider these alternatives:

• Keep the card active with small, infrequent purchases: Charge a small amount, like a recurring subscription or a single cup of coffee, and pay it off immediately. This shows activity and prevents the issuer from closing the card due to inactivity.
• Transfer balances (carefully): If you have other high-interest cards, consider transferring a portion of the balance to your unused card, but only if you can pay it off quickly and avoid accruing interest.
• Contact the issuer to downgrade the card: If the annual fee is a concern, ask if you can downgrade to a no-fee card within the same product family.

When Closing Might Be Okay:

There are exceptions to this rule. Closing a credit card might be justified if:

• You’re struggling with overspending: If you’re tempted to rack up debt on the card, closing it might be the best decision for your financial health.
• The card has a high annual fee and you can’t downgrade: Evaluate if the benefits of keeping the card outweigh the cost.
• You’re consolidating debt and simplifying finances: In some cases, closing accounts after consolidating debt can be part of a larger, well-thought-out financial strategy.

The Bottom Line:

Closing unused credit cards isn’t always a straightforward decision. Carefully consider the potential impact on your credit score, especially regarding the age of your credit accounts and your credit utilization ratio. In many cases, keeping the card open, even with minimal activity, can be more beneficial than closing it. Ultimately, the best course of action depends on your individual circumstances and financial goals.

#Cardclosure #Creditscore #Debtimpact