Cancel an unused credit card: Is it the right decision?
Deciding whether to cancel an unused credit card is a common dilemma for many people. While keeping an inactive account open might seem unnecessary, canceling it can significantly impact your credit score.
Understanding how credit cards affect your financial profile and knowing when to keep or cancel one is essential for maintaining a healthy credit standing.
In this guide, we discuss the effects of canceling an unused credit card, scenarios where it makes sense to keep or cancel it, and provide a step-by-step guide on how to cancel your card correctly.
Keep reading to make an informed decision about your unused credit cards.
How to cancel an unused credit card affects your credit score
Canceling a credit card is not as simple as it seems, especially when it comes to your credit score. Here are the main ways it can impact your financial profile.
Reduces average account age
Cancel an unused credit card can reduce the average age of your credit accounts, a key factor in determining your credit score.
Older accounts demonstrate a longer history of responsible credit use, making you more appealing to lenders.
Closing a long-standing account risks shortening your credit history, potentially lowering your score.
This is particularly impactful for those with limited credit histories, as every year of account age contributes to overall creditworthiness.
Increases credit utilization ratio
Your credit utilization ratio, which measures how much of your total available credit you’re using, can increase when you cancel a credit card.
For instance, if you have $10,000 in total credit limits and cancel a card with a $5,000 limit, your available credit decreases, potentially raising your utilization ratio.
A higher utilization ratio indicates greater reliance on credit, which can negatively affect your credit score.
Maintaining a utilization ratio below 30% is ideal for healthy credit.
Removes positive payment history
An unused credit card can still contribute positively to your credit report by showing a history of on-time payments.
When you close an account, its payment history may eventually drop off your credit report, reducing the positive data used to calculate your score.
While closed accounts can remain on your report for up to 10 years, their impact diminishes over time, potentially lowering your score as they age.
When keeping an unused credit card makes sense
Sometimes, keeping an unused credit card open is the smarter financial decision. Here are some scenarios where this is beneficial.
- To build credit: If you’re working to establish or improve your credit score, keeping a card open can help. A long credit history and a low utilization ratio positively impact your score. Keeping the account open ensures you leverage its benefits to strengthen your financial standing.
- When preparing for a loan or mortgage: Before applying for significant loans like a mortgage, maintaining stability in your credit profile is crucial. Closing a credit card could lower your score and make you appear riskier to lenders. If you’re planning a major financial move, keep your accounts stable to secure better loan terms.
- If there’s no annual fee: No-annual-fee cards are low-maintenance tools to support your credit score. They cost nothing to keep open and continue contributing to your credit age and utilization ratio. Regularly monitoring the account prevents inactivity fees or fraudulent charges.
When canceling an unused credit card is recommended
While keeping a credit card open can be advantageous, there are situations where canceling it is the right choice.
High annual fees
If your unused credit card has a high annual fee, and you’re not reaping any rewards or benefits, canceling it may make financial sense.
Paying for a card you don’t use can strain your budget without providing significant value, so it’s better to eliminate this unnecessary expense.
Recently opened accounts
New accounts haven’t had much time to positively contribute to your credit profile, so closing them usually has a minimal impact on your score.
If you realize shortly after opening a card that it doesn’t meet your needs, canceling it early can help avoid additional complications later.
Reducing spending temptation
For some people, keeping an unused credit card can lead to unnecessary spending or accumulating debt.
Canceling the card removes temptation and helps you focus on managing your finances responsibly. This is especially helpful for those working to maintain a strict budget or pay off existing debt.
How to cancel an unused credit card
Canceling a credit card isn’t complicated, but it’s important to follow the right steps to minimize any negative effects on your credit score. Here’s how to do it:
- Pay off the balance: Ensure the card has no outstanding balance before starting the cancellation process. Credit card issuers typically don’t allow account closures with remaining debt, and transferring the balance to another card may increase your credit utilization ratio.
- Redeem rewards or benefits: If your card includes a rewards program, such as cashback, points, or travel miles, redeem them before closing the account. Most issuers don’t allow you to transfer or use rewards after cancellation.
- Contact your card issuer: Call your credit card issuer or use the secure online messaging platform to request account closure. Be prepared to verify your identity and confirm that the balance is fully paid. Request written confirmation of the closure for your records.
- Check your credit report: After the account is closed, monitor your credit report to ensure it’s accurately reflected as “closed by the cardholder.” This helps prevent potential issues, such as unauthorized charges or reporting errors.
Making the right decision for your unused credit card
Deciding whether to cancel an unused credit card requires careful consideration of its impact on your credit score and financial goals.
While keeping a card open can help maintain a strong credit profile, there are valid reasons to cancel, such as avoiding fees or managing spending habits.
By understanding the pros and cons and following a proper cancellation process, you can make the best decision for your financial future.
For more tips on managing your credit effectively and achieving your financial goals, explore other articles on our site.
Stay informed and take control of your credit today! Read this post and learn how to improve your credit score.