If you have an unused credit card floating around, you may have thought about closing it. But should you?
While keeping it open may seem pointless, having a credit card with a zero balance on your credit report could be a good thing.
By putting in a little extra effort, your rarely used account can remain active and give your credit score a boost. But if you close your card, there's a right way (and a wrong way) to do it.
Why You Shouldn't Close An Unused Credit Card?
Before you close your account and send your card through the shredder, consider the effect it will have on your credit score.
Unless the account has an annual fee, keeping it open might be the best thing for your finances.
According to FICO, your credit score consists of five different factors:
- Your payment history (35%)
- The amount you owe compared to your available credit (30%)
- How long your credit history is (15%)
- New credit lines (10%)
- The types of credit accounts you have (10%)
A credit card you don't use any more directly affects two of the five factors: the length of your credit history and the amount you owe compared to your available credit (aka your credit utilization ratio).
With so many things depending on your credit history, good credit is essential in life. Your score can affect your insurance premiums, the deposit you pay on cell phone plans or other utilities, and your interest rates if you want to buy a house or a car.
How Closing An Unused Credit Card Affects Your Credit Score
Most of the time, unused credit cards are the ones people have had the longest. That's because it can get pushed to the back burner when a shiny new card comes in the mail with promises of cashback or travel rewards.
But remember that the length of your credit history is 15% of your score. If your unused card is the one you’ve had the longest, your credit score could take a hit if you close it.
Your credit utilization ratio is another significant factor. It measures how much credit you've used compared to the total credit you have available. Credit utilization makes up 30% of your score, and any change in that number can have a big impact.
Let's say you have three credit cards with a combined credit limit of $15,000. One credit card hasn't been used in a while, and it has a zero balance with a credit limit of $7,000. You regularly use the other two cards for travel and daily living expenses and have a balance of $4,000 between them.
In this instance, your credit utilization is 26%. The general guideline is to keep it below 30%, so you're doing pretty good.
What happens if you close your unused account?
Your total available credit drops by $7,000, bringing your combined credit limit to $8,000. Now your credit utilization ratio is 50% – and that's not so good.
What To Do If You Have An Unused Credit Card
Keeping your unused credit cards open is usually best. You can benefit from a longer average credit history and a lower credit utilization ratio. When used the right way, your previously neglected credit card can improve your credit score in a big way.
Some companies can close credit accounts after periods of inactivity. Because the time a card issuer waits before closing the account can vary, consider setting up an automatic bill payment for a recurring monthly expense.
You might use the card to pay for your Netflix subscription or your monthly gym membership.
By using the card regularly, the account will remain active. Make sure you remember to pay the balance in full and on time every month to keep negative marks from lowering your credit score.
When Closing An Unused Card Is A Good Idea
A few situations exist when closing an unused card is a good idea. For instance, if your card comes with a hefty annual fee, closing it can help to keep more money in your pocket.
Another reason to close the account is if you have trouble controlling your spending. By not having access to the account, it won't tempt you to rack up a huge balance.
But what if you want to lower the number of open credit cards you have? Luckily, there are ways to close your accounts that will minimize the effect on your credit score:
- Close only your newest cards
- Close accounts that cost you money to maintain
- Close the account with the lowest credit limit
- Pay off balance on all other cards before closing an unused account
How To Close An Unused Credit Card
If you decide closing an unused account is in your best interest, do it in a way that has the least damage to your credit score.
First, you should stick to closing one account at a time, even if you plan to close several cards. Pay off the balance before you attempt to close the card and make sure you redeem any rewards on your account before you cancel.
Once you confirm your balance is zero, call the number on the back of your card to ask them to cancel the card. Follow up on your request by mailing a certified letter to the card issuer stating you want to cancel the account. It’s smart to ask them to send you a letter to confirm your balance is zero and that your account is closed.
One word of caution: if you're planning to take out a loan soon, your best bet is to keep your credit card accounts open. Fluctuations in your credit score can be a red flag to lenders, which can hurt your chances of being approved.
Keep in mind that financial decisions are personal. Generally, it's best to keep accounts open even if they're not being used, but what's right for you depends on your preferences and financial goals.