Is it Beneficial or Not to Close Credit Cards I Don't Use?
- Your utilization ratio represents the amount of credit you've used: the combined balances on all your credit card accounts compared to the sum of the limits on those accounts. A low utilization ratio helps maintain good credit because it indicates responsible use, and your unused card helps with that. For example, if you have a total balance of $5,000 on all your credit cards, and your combined credit limit is $20,000, which includes $10,000 on an unused card, you have a utilization ratio of 25 percent. However, if you close the unused card, the ratio rises to 50 percent, thus harming your credit.
- Keeping unused cards open also demonstrates your credit history. If you've used credit cards for a long time, it shows you're someone who knows how to use credit wisely. If you close an unused card, the time you've kept it vanishes from your credit report after a period of time, and it may make it appear that you've used credit cards for a shorter time than you have.
- The most obvious benefit of an unused credit card is the funds it gives you in the event of an emergency. Some credit cards also offer incentives such as airline miles or cash back, which might make keeping a card open worth it. In addition, closing a credit card just before a major purchase such as a house or a car raises warning flags with your creditors, making it tougher to secure a loan or mortgage.
- The drawbacks of keeping an unused credit card open vary by circumstance. Some credit card companies charge annual fees for their cards, costing you money even though you aren't using them. In addition, closing an unused card eliminates the temptation to make purchases on it (thus increasing your debt).