Canceling a credit card you never use might seem wise, especially if you opened the card with a special offer just to get a discount on a big-ticket purchase. After all, you donate rarely worn clothes to the neighborhood thrift shop and sell unwanted gifts on Craigslist, so why not get rid of a credit card you never use?
For starters, closing a credit card account can affect your life a lot more than donating a pair of ill-fitting yoga pants to Goodwill or selling a lumpy recliner. That’s because closing a credit card can hurt your credit score.
Whether canceling a credit card will affect your credit score depends mainly on your credit history and how much debt you have. At the same time, closing more than one card will have more of an effect on your credit score than closing just one account.
If you’re thinking about canceling a credit card you never use, check out these four reasons why closing a credit card account might not be a good idea.
Your credit utilization rate could increase
“I can’t think of any good reason to close a credit card, especially if it’s been open a long time and has a high credit limit,” credit expert John Ulzheimer says.
Why? When you close a credit card account, you lose a line of available credit that might benefit your credit score.
Creditors take into account your credit utilization rate (also called a credit utilization ratio) when extending credit and setting interest rates. In fact, your credit utilization rate can make up 30% of your credit score, according to credit bureau Experian. Ideally, you should keep your credit utilization rate at or below 30%.
You can calculate your credit utilization rate by dividing your total debt into total available credit lines. For example, let’s say you have two credit cards, including the one you’re thinking about closing, which has a zero balance and a $10,000 credit limit. The other card has a $10,000 limit and a balance of $5,000.
The two credit limits total $20,000, so the credit card debt percentage is only 25%. However, close one card and your credit line total drops to $10,000, while your credit utilization ratio jumps to 50%. That will have a negative impact, harming your credit score.
How long you’ve had a credit card matters
Creditors like to see a long credit history, and a credit card you’ve had for a long time might carry a higher credit limit, which improves your credit utilization rate, Ulzheimer says.
Even when you cancel a card, the account history remains on your credit report for 10 years, so you still stand to benefit from the lengthy history. However, you’ll no longer have that older card’s credit limit to boost your credit score.
You might lose unredeemed rewards
Don’t make hasty decisions about closing a credit card account before redeeming cash back rewards or perks that you could lose if you close the account. If you must cancel a card, make sure you redeem all points for travel, gift cards, or cash back beforehand.
A balance on a closed card works against you
If you haven’t used a card while trying to pay off the balance and you’re worried that you’ll slip and start using the card again, closing the account might seem like the best option. However, you might regret closing the account even if you still have a balance.
That’s because when you close a credit card, its credit line disappears. So, if you owe a balance on the canceled card, you’ve got 100% credit utilization on that card, which factors into your overall credit utilization rate.
Instead of Canceling a Credit Card
- Set the card aside. Maybe you froze your credit card in a block of ice once to prevent using it, but you melted that sucker down and went shopping anyway. However, what if you have more restraint now? You can always put the card in a safe deposit box at the bank. Sure, you can still get to the card, but it’s harder to make impulsive purchases. Remember to remove it from any digital wallets or recurring payment accounts as well. And still check the account regularly for fraud or unauthorized purchases, even when you’re not using it.
- Renegotiate terms with the credit card issuer. Ask your credit card issuer whether you can switch to a card with no annual fee, if the annual fee is an issue. Maybe you can get a better interest rate, so it’s beneficial to start using the card again. The card issuer could even bump up your credit limit, making an open card with a zero balance even better for your credit utilization rate.
In the end, you are often better off just keeping the credit card account open with the credit card company.
“There’s so much value in having a card open and available, with thousands of dollars available if you need it,” Ulzheimer says.