If you have old unused credit cards sitting in your wallet, you might be tempted to close your account. Most financial advisors will tell you to resist this urge and leave them open, so there may be instances in which you should leave it open. Most of these reasons boil down to credit.
No one knows definitively how FICO scores are calculated, but there are some widely known factors that affect your score. Unused credit cards influence your credit rotation and other factors of your credit score. Depending on your situation, your unused credit cards may work for or against you.
Read our full article below to understand when you should cancel unused credit cards and when to leave them open.
Why Should I Keep My Unused Credit Card?
When it comes to keeping unused credit cards, it all comes down to your credit score. As counterintuitive as it may sound, it may actually help your credit score if you keep some unused or barely used credit cards open. This is because they can help influence two major factors that determine your credit score: the length of your credit history and your credit utilization ratio.
The length of credit history makes up 15% of your FICO score. It is specifically determined by the age of your oldest account, the age of your newest account, and the average age of all your accounts. High credit scores are awarded to people that have older credit accounts. This is because it shows that they are able to manage credit long term.
If you have old, unused credit card accounts, leaving them open would influence the length of your credit history for the better. Old credit card accounts show that you are able to responsibly manage your credit over time. Creditors like to see this when considering approval for long-term loans, such as a mortgage.
In addition to credit history, credit utilization is an important factor in determining your credit score. In fact, credit utilization makes up 30% of your FICO.
Credit utilization considers debt-to-income ratio across your accounts as well as your credit card balances compared to the limits. These ratios should be as low as possible, but it is not ideal to keep them at zero. The best credit scores are given to people that use their credit wisely.
Unused credit cards can help boost your credit utilization ratio because it is considered credit in rotation. Credit card accounts with low spending and high limits show that you have credit in rotation that you are using sparsely and wisely.
Why Should I Close My Unused Credit Card?
Just as there are reasons to leave credit card accounts open, there are reasons to close them. Your credit card accounts may influence your credit score negatively if you have too many. This is because they can impact the part of your credit score that evaluates types of credit used.
The type of credit that you have in rotation makes up 10% of your FICO score. If your mortgage and car loan take up the majority of your credit, this can positively impact your score because they are long-term loans. If the majority of your credit is made up of multiple credit cards, this can hurt your score.
Credit cards are considered the worst kind of revolving credit. This is because you can easily rack up debt and use the credit irresponsibly. Creditors can see how many credit cards you have open, and they may make loan decisions based on this information. If you have too many open credit cards, you may be seen as a borrower who lacks impulse control.
Besides their impact on your credit, unused credit cards can make you a target for identity theft. Identity theft can happen to anyone, but it is more likely to happen if you have a bunch of credit cards open. If you want to reduce your chances of becoming a victim of identity theft, it may be best to close some of those newer accounts.
What to Do with Unused Credit Cards
Credit card companies will close credit card accounts if they aren’t used, so what should you do with credit cards you want to keep? The best way to make use of these cards is to set them up as automatic payments on necessary bills.
We all have bills that recur on a monthly basis. Whether it’s a streaming service, utility bill, or subscription, there are small expenses that are automatically charged to our account. To ensure that these cards don’t go unused, it is best to use them to pay for each of these services. You can also set up the card to pay itself off each month automatically so that you don’t have to worry about checking each one.
How to Cancel Your Credit Card
If you decide it is best to close a credit card, there are ways to do it so that the impact on your credit score and wallet is minimal. Here are some steps to take when canceling an unwanted credit card.
Pay off the balance
Credit card companies don’t take kindly to people that try to cancel their cards with a balance on it. In fact, they may raise your interest rate to the highest level as a penalty. This means you’ll have to pay off the balance with this astronomical interest rate. Avoid this by paying off the entire balance ahead of time.
Be sure also to redeem any rewards that are currently pending. If you have sky miles or cash back, make sure you use them. You won’t be able to access them once you close the account.
Contact the issuer
After you pay off your balance, follow up with the issuer in a phone call to confirm that the credit card balance is zero. There are sometimes lingering charges that haven’t posted yet, so it’s important to get a verbal confirmation.
You will also need to let the representative know that you are canceling the card. It’s good to tell them so that they can make a note in the file.
Send a follow-up letter
Simply telling the representative that you are canceling the card is not enough. You will also need to send a letter stating that you’re closing the account. Clearly state that you are closing the card and want this reflected on your credit report.
After closing the card, check your credit report in 30 days. You should see the account noted as ‘closed by the account holder.’ If you don’t, reach back out to the issuer and remind them to update your credit report.
Should YOU Cancel Your Unused Credit Card?
It is difficult to give one-size-fits-all advice when it comes to your credit score. The way FICO calculates your score is tricky, and numerous factors can hurt or help your score. Unused credit cards have the potential to push your score in either direction.
Your credit score will be influenced based on the age, limits, quantity, and vulnerability of your unused credit cards.
Generally, it is best to leave a few unused credit cards open to boost your credit length and debt-to-income ratio. If you have a lot of unused credit cards, you will do well to close a few so that potential lenders don’t see that you have too many credit cards in rotation.
Ultimately, there is not a definite answer for success. It is up to you to decide if it is best to close the unused credit cards or leave them open based on these factors. If you are still confused, try speaking with a financial advisor. They can help you understand what decisions to make to move your credit in the right direction.