Is it better to cancel unused credit cards or keep them open?
Keeping up a good credit score is one of the most important things you can do for your overall financial health. Your credit score is vitally important to your ability to get loans, low interest rates, and potentially some job offers. Keeping up your credit score requires discipline and organization. However, it also requires engaging in some counter-intuitive activities, like regularly using your credit cards. It also may mean keeping credit cards open, even if you don’t use them.
Believe it or not, generally speaking, it is better to keep an unused credit card open, rather than just canceling it. There are a few reasons why this is the case.
First: A huge part of your score is your overall credit utilization rate. This means what percentage of your credit limit you use. Your credit utilization score is determined by both your overall credit debt and your cumulative credit limits on all of your cards. Lower credit utilization rates will result in a better credit score. However, canceling a card lowers the overall credit available to you. This, in turn, will increase your credit utilization rate, and that could lower your score. This could be even more problematic if you have extensive use of other credit cards, meaning you are approaching the limit of these cards. Having an unused credit card can help to maintain your overall credit rating, as it provides a cushion of use when it comes to your credit utilization rate.
Another important piece of your credit score is your overall credit history. Credit scores are determined by how long you have cards open, with a longer history being viewed more positively. Canceling a credit card can lower your average credit history. This, in turn, can also result in a lower score.
It is also usually advisable to have a credit card available, even if you don’t use it. Unfortunately, emergencies to come up, and having an otherwise untapped line of credit available can be very useful to you. Furthermore, you may find yourself in a position where you need to open another credit card, even after you canceled the unused one. Even with a high credit score, opening a new credit card requires a new hard inquiry, and this hard inquiry will cause a brief and small drop in your credit score. These hard inquiries typically drop off of your credit report after a few months, but it will cause your score to briefly dip downward.
All of this being said, there is one circumstance in which you should cancel a credit card: If it has an annual fee. Unless the fee somehow justifies the spending – like with many rewards programs – keeping open an unused card with a fee simply isn’t worth it. However, alternatively, you can request that a card be downgraded to a fee-free version. This will allow you to keep the card without the fee.