Should You Close Your Unused Credit Cards

Sometimes, when people receive a new credit card, they consider closing an older card that they no longer use. Cardholders who find it difficult to manage multiple credit cards may also think of closing a card or two to streamline their finances. But is it a good practice? Let us find out. 

But before that let us talk about a few common circumstances under which you might consider closing a credit card.

1. When your credit card undergoes a major devaluation and no longer offers benefits that compensate for its annual fee
2. When you no longer use a credit card but it carries high annual fee
3. When you get a new credit card that offers you better benefits than an existing card
4. When the provider has discontinued the card variant you hold and replace it with a card that does not align with your spending habits
5. When you have multiple credit cards with outstanding dues on each, and find it difficult to manage the debt

In any of these situations, closing a credit card might seem to be a viable option. However, many cardholders do not know that closing a credit card, especially one of your oldest accounts, has direct impact on your credit score. Read on to know how:

1. Increase in Credit Utilisation Ratio (CUR)

The credit utilisation ratio (CUR) is the ratio of credit amount that you use compared to your total credit limit available with you. Here, the total credit limit includes all your credit card accounts. It is generally better to have a low credit utilisation ratio, as it indicates that you are not overly reliant on credit. So, even if you have some unused credit cards, they still help by increasing your total available credit and keeping the ratio low.

If you cancel any of your credit cards, this credit limit drastically reduces, which can increase your CUR if your spending remains the same. This increase in credit utilisation can have a negative impact on your credit score.

2. Drop in Average Credit Age

The older your credit or loan accounts are, the longer your credit history will be. It is preferable to have a long credit history as it reflects that you are experienced with credit and skilled at managing your credit accounts, which has a positive impact on your credit report.

So, closing an older credit card, even an unused one, can lead to a decrease in your average credit age and, consequently, a drop in your credit score. For example, if you opened your first credit card account 8 years ago and have been using the card since.

Now, if you got a second credit card 6 months ago and close the older card, it will have a major impact on your score as you will lose the 8-year-old account, indicating that your credit profile is only 6 months old.

3. Loss of Card Benefits

Whenever you get a credit card, it comes with its own unique set of features and benefits such as complimentary lounge access, movie discounts, co-branded offers, and more. Even if you do not use a particular card for your regular expenses, you may still want to take advantage of these benefits. If you decide to close a credit card, you will miss these perks.

Therefore, it is essential to carefully assess the benefits offered by the card that you are thinking of closing, taking into account both your current and potential future spending patterns. It will help you assess the benefits of the card and determine whether closing the card is the right choice for you.

Despite the negative effects discussed above, closing your credit card account might still be a good choice in certain situations. Discussed below are few such cases to help you decide whether cancelling your card would be a good option for you or not.

When Should You Close Your Credit Card?

If you have a credit card that you aren't using, has basic features that are not very useful to you, and carries a high annual fee, it's best to cancel that card. Keeping such a card can be a financial burden rather than helping you save on your spending. Additionally, if you have multiple credit cards and struggle to manage them responsibly, it may be wise to cancel one of them. Failing to manage all your cards and missing payments can make you appear credit-hungry and negatively impact your credit score.

In such cases, choose to cancel a card that is seldom used, offers minimal benefits, and is the newest among all your cards. Cancelling an older credit card can reduce your credit age and shorten your credit history, which can have a negative impact on your credit score.

When Should You Not Close Your Credit Card?

If you have a credit card that you have not used in a while, first check if it has an annual fee. If it does, take some time to review its benefits and see if you can make use of them to compensate for the annual fee. If you can then keeping the card may be the right decision. If the card does not have an annual fee, it's still best to keep it, as it doesn't add to your expenses and its credit limit can be kept for emergencies.

There is no definitive answer to whether you should close your unused credit card or not. The decision depends on individual needs and several factors such as the card's annual fee, whether the card is new or has been with you for a long time, whether you can still make use of its features, its credit limit, and more. 

You should first assess your personal spending habits and determine whether the card's features will benefit you in the long run, as well as how closing that account will impact your credit profile, before making a final decision.

Instead of closing a card, you may also ask your card provider to replace your card with another low or no annual fee card. In this case, you can continue getting the benefits of a card whenever needed and use the available credit limit to improve your credit score.