3 Signs It's Time to Close Your Unused Credit Card -- and What to Do Next

You've got an unused credit card that's taking up valuable real estate in your wallet. Closing that card might seem like an easy call, but it's actually not always a straightforward decision. Canceling that card could have unintended consequences for your finances, so it's best done only in specific situations. Here are three times it's actually worth closing a credit card and one thing you should do after closing the card to minimize the effect it has on your credit score.

What's wrong with closing a credit card?

Closing a credit card means you lose access to that credit limit. It might not be a big deal to you if you weren't using it. But it matters to the three credit bureaus -- Equifax, Experian, and TransUnion. Losing access to credit raises your credit utilization ratio -- the ratio of the amount of credit you use each month and the amount you have access to.

For example, if you have a $10,000 limit and you have a $2,000 balance, your credit utilization ratio is 20%. It's important to keep this under 30% to keep your credit score high. That's why many prefer to leave old credit cards open, even if they just collect dust.

When should you close a credit card?

There are three times when closing a credit card can be worth the hit to your credit score.

1. The card charges an annual fee

Cards with valuable rewards, like some travel credit cards, often have annual fees. These can sometimes cost cardholders hundreds of dollars per year. If you use the card enough to get the annual fee back in rewards, it's not a big deal. But if you're not using the card, holding onto it is a waste of money.

2. It's tempting you to overspend

Some people are tempted to spend their available credit even if it's not the best move for their finances. Charging more to your credit cards than you can pay back each month results in costly interest charges and often a debt cycle that's hard to get out of. Those worried about falling into this pattern may prefer to remove the temptation of the unused card altogether.

3. You don't want to keep monitoring it

Even if you're not using a credit card, it's still a good idea to check your account periodically to make sure no one else is. Perhaps you made a family member an authorized user a while back and forgot about it. Or maybe an identity thief got hold of the card and is racking up fraudulent purchases in your name. Checking the account might be the only way to catch this before you get a bill. But if you don't want to do this regularly, closing the card might be the better option.

What to do after closing your credit card

To close your card, all you have to do is contact the card issuer and let it know that you want your account closed. This won't get you off the hook for any money you still owe the issuer, though.

Then, wait a month or two to be sure the card issuer has had time to report the account as closed to the credit bureaus. After that, you probably want to check your credit reports and scores. This will give you an idea of how closing the card has affected your credit.

You can view your credit reports for free at AnnualCreditReport.com. This shows all of the open credit accounts in your name, your balances, and your payment history. But it doesn't tell you your credit score, which is what lenders use when deciding whether to loan you money.

There are many companies offering free credit scores, but you want one that's offering FICO® Scores, since that's the one lenders use most often. FICO, the creator of FICO® Scores, now enables you to get access to your Equifax FICO® Score for free. Experian also offers a free FICO® Score service.

Scores range from 300 to 850, and a higher score is better. Ideally, you'd like a score of 670 or higher. If your score is lower than this, you can try taking steps to raise it. But this usually takes time.

Closing your credit card raises your credit utilization ratio, but there are ways to lower it again. First, you could charge less to all your credit cards each month. Or you could pay your bill twice per month. Credit card issuers only report your balance to the credit bureaus once per month, so paying twice makes it appear as though you spent about half as much as you actually did.

You could also try requesting a credit limit increase on some of your other cards. But it's best to do this only if you feel reasonably confident that you'll be approved. You'll have the best shot if you've been a reliable borrower and you haven't applied for new credit within the last six months or so. Applying for too much new credit raises a red flag with lenders because it makes it appear that you need to borrow money in a hurry.

After you make your changes, check your credit scores again in a month or two to see their effects. And keep taking positive steps as much as you can to keep your credit score high.