You're flipping through your wallet when you come across a credit card you've had forever, but also haven't used in ages. Rather than allow that card to occupy valuable real estate in your not-so-large wallet, you rush to cancel it. After all, what's the point of keeping an old credit card that no longer serves your needs?
The truth is that in some cases, it pays to close a credit card you never use. For example, if your card charges an annual fee, there's no sense in paying for something you don't benefit from. But as long as it won't cost you money, it often pays to keep old accounts open -- especially cards with a high credit limit. That's because hanging on to those credit cards can improve your FICO score, even if they're just sitting around collecting dust.
Why it pays to keep unused credit cards
Holding on to an older credit card is a wise move for one simple reason: Doing so can boost your credit score. To see why it's smart to keep an old credit card, you'll need to first understand how credit scores are calculated.
There are five key components that go into a credit score, each of which carries a different amount of weight:
- Payment history (35%), which speaks to your likelihood of paying your bills on time.
- Credit utilization ratio (30%), which is the extent to which you're using your available credit.
- Length of credit history (15%), which is the amount of time you've kept your accounts open.
- New credit accounts (10%), which speaks to your tendency to rely on financing.
- Credit mix (10%), which represents the various types of credit accounts you have open.
Maintaining an old but never-used credit card can help with two of those components: credit utilization and length of credit history.
The latter is fairly self-explanatory when you think about it. Credit bureaus like to see a history of consistency from borrowers, and so if you keep a card in good standing for, say, 10, 15, or 20 years, it's going to work in your favor. That's why it frequently makes sense to keep an old credit card, even if you're using it sparingly or not at all.
Now let's talk credit utilization. Your credit utilization ratio shows how much of your total available credit you're actually using at a given point in time. Ideally, this ratio should be kept as low as possible, and if it surpasses the 30% mark, your credit score could get damaged.
So how does an old credit card help with credit utilization? It's simple. If that card offers a generous credit limit that you're not using, you'll have an easier time keeping your personal ratio down. And since long-term cards tend to offer higher credit limits than newer cards, keeping that unused card open could work in your favor.
Imagine you have two credit cards that you actively use, and an older one that's been sitting in your junk drawer just waiting to be closed. If the first two cards each have a $2,000 limit, but your older card has a $5,000 limit, that gives you $9,000 to work with. Of that, you'll want to keep your total outstanding balance at or below $3,000 to avoid hurting your credit score, but that leaves you a pretty decent chunk of wiggle room in using your line of credit. On the other hand, if you close that older card, your credit limit will be just $4,000, which means you'll need to keep your outstanding total balance to $1,200 or less to preserve your credit score.
Now if you're dealing with a credit card that comes with a hefty annual fee, it typically makes sense to close it if it's not being used. Otherwise, leave that account be. Keeping an old credit card can help your score in more ways than one, so if you're willing to give up a touch of wallet space, it could pay off in a very big way.