- If you have an old credit card you aren't using, you may be tempted to cancel it.
- It's usually a bad idea to close down old accounts.
- Potential damage to your credit is just one reason to keep your old card open.
Don't close down your cards until you've read this.
If you have a credit card account and you stop using the card, then you'll have to make a choice.
You'll need to decide if you want to keep the old account open even if you aren't regularly charging anything on the card anymore -- or whether you'd be better off closing down the account.
In general, it's usually a bad idea to close down the old credit card accounts. And there's two primary reasons why that's the case. Here's what they are.
1. Canceling old credit cards could hurt your credit score
The biggest reason to keep old credit card accounts open is because closing them will typically cause your credit score to fall.
Your credit score is based on a few primary factors, including payment history, percent of the credit available to you that you've used (called credit utilization ratio), types of credit, new credit you apply for, and average age of credit. Three of these factors are adversely impacted when you close your old credit card accounts.
Closing the account will eventually cause its payment history to drop off your report, which means you lose the benefit of your record of on-time payments, assuming you paid the card responsibly. When the card drops off your credit report, your average age of credit will also be shorter, due to the fact you no longer have that old account on your record.
The credit line on the card will also disappear as well, which means the percent of credit used versus credit available will also be impacted. Say you had two cards -- your old one with a $2,000 balance you no longer use and a new one with a $2,000 balance you've charged $1,000 on. You're using $1,000 out of $4,000 in available credit, so your utilization ratio is 25%. That's below the 30% utilization ratio necessary to avoid hurting your credit score.
If you close the old account and lose the $2,000 credit line, your new utilization ratio will be 50% -- $1,000 of your $2,000 limit is used. This will damage your credit score.
For all these reasons, it's best to keep the old account open even if you aren't using the card any longer.
2. You'll lose access to credit you may need
Another big issue is that you never know when you'll need to borrow money. Ideally, you don't want to charge purchases on your credit cards that you can't pay off. But sometimes things happen and you have no choice but to borrow.
In these situations, it can be beneficial to have credit available on your cards so you don't have to try to open a new account during times of financial trouble, and so you aren't forced to switch to even more expensive types of loans such as payday loans.
If you keep your old account open, you can avoid damaging your credit and can make sure you have access to an open line of credit in case the worst occurs. There's little reason to give up both of these benefits in most situations, especially if there's no downside to simply not closing down your old account.
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