Canceling Your Credit Card? Not So Fast -- Try This Instead

You might assume it's a good idea to just cancel any credit cards you're not using. Unless those cards are tempting you to overspend, it's actually better to just hang onto them, and if they charge an annual fee, you have an option to save yourself some money. Here's what to do about an unused credit card.

Downgrade it -- or let it ride

You have two options to deal with a credit card you no longer want to use but don't want to cancel. If the card is a higher-end one, it might have an expensive annual fee. And there's no sense in paying an annual fee for a card you're not using.

In this instance, try calling the issuer to ask about downgrading the card. This means swapping it for a card in the same product line with no annual fee. Often, these will earn the same kind of rewards, but at different rates.

Credit card companies would always rather keep you as a customer (especially if you've been a good one, and paid your bills on time) than lose you, so most will be willing to do this without a hassle. Alternatively, you may be able to ask nicely and get the fee waived for the year -- this may not work, but it doesn't hurt to ask.

If the card doesn't have an annual fee and you're not using it anymore, it's still not a good idea to just cancel it outright (unless, of course, it's tempting you to overspend). Instead, just hang onto it. Keep the physical card in a safe place, and check in on it every so often by signing into your account. You'll need to use the card occasionally (perhaps once every six months to a year) to keep the account active, but this doesn't need to be a big deal.

I've got a card that I don't really use anymore, and I heard from the issuer that it would cancel my account due to inactivity. Since I wanted to keep the card and its credit limit (more on that below), I used it to buy some wine a few weeks ago. Then I paid off the charge, and the card will stay active -- to the benefit of my finances.

An unused credit card can be good for your credit

There are two ways that keeping an unused credit card can benefit your credit score, a vital piece of your financial picture.

Credit history

If you've had the card for a while, it's boosting your credit score by giving you a longer credit history. Length of credit history is 15% of your FICO® Score, and when lenders check your credit, they like to see that you've successfully managed credit for a long period. If you've had many years of using the card and paying it off, hanging onto it can have this tangible benefit.

Credit limit

Your credit utilization ratio forms 30% of your FICO® Score -- this is the amount of credit you're using vs. how much you have at your disposal. If you've got a credit limit of $10,000 across three cards, but are carrying balances that total $2,500, you've got a credit utilization ratio of 25%. It's good to keep this figure under 30%. So that old credit card is helping you boost your total available credit limit and lower your credit utilization ratio.

Don't be so quick to cancel a credit card you no longer want. Instead, see if you can downgrade it to a card without an annual fee, and just use it occasionally to keep the account active. The benefits for your credit score (and your finances) can't be beat.