If you have unused credit cards, the big question is: should you cancel them or keep them? This decision can be tough, but it's important to consider your average credit history and scoring models. In this article, we will break down when you should close unused credit cards and when you should keep them. We will also provide some tips on how to improve your credit score!
The impact of cancelling unused credit cards on your credit score
Keeping a credit card open if you aren't using it might seem odd. This is especially true if you believe closing an account would prevent you from overspending—an excellent idea in this economy. However, closing a credit card may have a detrimental impact on your credit rating. Here's how:
Increased Utilization: Your credit utilization percentage is the proportion of your revolving debt to your total credit limit. The lower your rate, the better. If they give you a loan, it shows that lenders trust you to use credit wisely if they extend it to you and that you're not maxing out your cards.
The decreasing average age of accounts: The length of your credit history has a lesser impact on your credit score than the amount of money you owe. This factors in 15% of your FICO® Score. The average age of your accounts decreases when you close a credit card account, especially the oldest one.
Keeping an unused credit card
The usage of unused credit cards has the potential to decrease your score. Keeping open unused credit accounts, particularly if you're hoping to apply for new credit—such as a mortgage loan—can help maintain a good credit score.
Check your credit report to see if there are any older credit card accounts and plans that you should keep open. It's also a good idea to maintain an account with a high credit limit when closing one of them would significantly reduce the amount of available credit.
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What you can do if you are paying for an annual charge and no longer want to use that card is call the firm and ask them to lower your card to the free edition. Companies generally desire your business as it's easier for them to retain a customer than to acquire a new one. As a result, they will downgrade your card to the free version so they can keep you as a client.
In the long run, this should keep your average age of credit the same and you won't be paying the annual charge on any unused credit cards.
Cancelling your credit card
If you decide that you no longer want to keep an unused credit card, make sure you cancel it properly. The best way to close a credit card is to call the customer service number on the back of your card and speak with a representative.
Be sure to ask the representative to confirm in writing that your account has been closed and that no further charges will be made to the account. Once you have this confirmation, shred your credit card.
You should also check your credit report a few months after account closure to ensure that it has been reported as closed by the creditor.
If you have any questions about cancelling your credit card or whether it's the right decision for you, be sure to speak with a financial advisor. They can help you understand the impact cancelling your credit card will have on your credit score and provide guidance on what steps you can take to improve your score.
Here is an overview of the two options to consider. There are advantages and disadvantages to both cancelling and keeping unused credit cards, as you can see. It's critical to consider all of your options and choose the one that is best for you and your financial goals.
We hope this article has helped you understand when to close unused credit cards. If you have any questions, please feel free to contact us! We would be happy to help you further understand your options and develop a plan that is right for you.
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