Should You Close an Unused Credit Card? The Pros and Cons
One of the most frequent questions that mortgage professionals, financial advisors and credit experts get is, “Should I cancel a credit card that I don’t use?”
The answer to that is no…or yes.
Unfortunately, it’s not cut and dried. Although closing an account can hurt your credit score, it can be beneficial in other ways.
First, let’s look at how it can hurt you financially. As a general rule, the longer your credit history, the better your credit score will be. If you’ve had the credit card account for a long time, closing it can make your credit history appear “younger” than it is and thus hurt your credit score. The length of your credit history makes up 15 percent of your total FICO credit score so it’s a good idea to keep long-term accounts open and in good standing.
Closing an unused credit card can also hurt your credit utilization ratio, which is 30 percent of your credit score. Your credit utilization ratio is the ratio of your overall credit balance to your overall credit limit. Generally, you want your ratio to be under 30 percent. As an example, if you have $10,000 of credit card debt and your total credit limit of all of your cards is $36,000, your ratio is 28 percent. If you close a card that has a limit of $12,000, your ratio will immediately jump to 42 percent—which can bring down your credit score.
Now, let’s look at how closing an unused credit card can help you. Although closing an account may hurt your credit score, getting rid of a credit card may have direct financial benefits. If your credit card has an annual fee, you can save money each and every year by getting rid of that card. Also, if you’re struggling to keep your credit card debt at a manageable level, having one less credit card—especially one with a high interest rate—may help you avoid the temptation to run up your debt.
Also, in terms of your credit score, closing a credit card account may not affect your credit right away or may affect it only for a short period of time. When you close an account (that’s in good standing), that account will still appear on your credit report for 10 years—and you’ll still reap the benefits of its history. You should also keep in mind that any hit to your credit utilization ratio or any other part of your credit score may be temporary.
In the end, you’ll need to take into account many different factors if you’re considering cancelling a credit card. Your best bet is to discuss your options with a financial advisor before making a decision.
For more than 25 years, Omega Financial has been serving mortgage clients in Massachusetts. Our brokers have approximately 50 years in the mortgage business. You always will receive fast, courteous, and accurate information. Omega Financial, Inc. is a company duly licensed to operate in Massachusetts as a Mortgage Brokerage. We are located in the Town of Norwood, Massachusetts where we have been operating as Omega Financial Incorporated since 1988.
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