Ask Yourself These 3 Questions Before Closing a Credit Card

Ready to cancel a credit card? Address these questions first.

There may come a point when you outgrow a credit card -- say, because you get newer cards with more generous perks and rewards programs. If you have a credit card that no longer pays to use, you may be tempted to just close the account rather than leave it open. But before you do, ask yourself these important questions to see if that's really the right call.

1. How long has the card been open?

Closing a card that's been open for a year or less shouldn't have much of an impact on your credit score. Closing a card you've had for many years, however, is a different story.

The length of your credit history is a factor that goes into determining what your credit score looks like. If you close an account you've had open for a long time, leaving yourself with newer accounts only, your score could tumble, so you shouldn't necessarily rush to close a card you've maintained for years.

2. What's my spending limit on the card?

Another important factor that goes into calculating your credit score is your credit utilization ratio, which measures the amount of available credit you're using at once. When that ratio climbs above 30%, you put your credit score in danger of dropping. And that's why it's important to not close a credit card with a generous spending limit.

Say you owe $3,000 on your credit cards but have a total spending limit of $10,000. Since you're right at that 30% utilization mark, you should be OK from a credit score perspective. But what if closing one of your cards brings your total spending limit down to $7,000? Suddenly, you're looking at a credit utilization ratio of about 43%, which could drag your score down.

3. Is there an annual fee?

Though there are certain situations where paying an annual fee is worth it, there's generally no sense in paying a fee for a card you don't really use or get much benefit from. But if you're thinking of closing a credit card that doesn't impose a fee, then you might as well keep it open, since you basically have nothing to lose by hanging onto it.

You might think that the more credit cards you have open, the greater your chances of falling victim to financial fraud. And there is some truth to that -- the more cards you own, the more card numbers a criminal could try to steal.

But often, it can work to your advantage to keep a credit card open, even if you really don't use it. And if you're worried about fraud, make a point to check your credit report several times a year. That should alert you to suspicious activity you can follow up on. You should also, as a general rule, log in to each credit card account you have monthly to make sure you don't see anything suspicious related to your account. But either way, keeping an old credit card could work to your financial benefit, so don't be too quick to cancel an account you no longer need.