Unused Credit Card? Here's How to Decide Whether to Cancel It or Keep It

If you have a credit card you aren't using any more and you don't plan to use in the future, you're going to have to make a decision about its fate. Specifically, you'll have to decide whether to close the account or keep it open.

Asking these five simple questions can help you make the right choice on that issue.

1. Does it have an annual fee?

Closing a credit card down can cause your credit score to take a hit. If there's no annual fee on the card, there's very little reason to close it. You can stick it in a drawer and use it once a year or so in order to make sure the card issuer doesn't close it for you. This way, you can avoid taking the hit to your credit, since the card isn't costing you anything.

2. Can you downgrade the card?

If the card does have an annual fee, then you may be able to call up the issuer and ask if you can downgrade the card. This would involve switching your expensive card with the annual fee to a different one in the card issuer's lineup that doesn't come with a charge. Your account wouldn't be listed as closed if you did this, and while you'd likely get fewer cardholder perks, it wouldn't matter anyway if you weren't using the ones you had.

If you can't downgrade and the card does have an annual fee, there are a few more factors to consider to decide if paying the fee is worth it.

3. How high is the credit limit?

It's worth considering how high the credit limit is when deciding whether to cancel or keep a card.

See, credit utilization ratio is the second-most important factor in determining your credit score, after payment history. The utilization ratio is the amount of credit used versus credit available. It accounts for 30% of your score, and you'll want to keep your utilization ratio below 30% to avoid hurting your score.

If you close a card that has a very high credit limit, this can do more damage than if you close an account with a lower one. Say you have two cards:

• One with a $10,000 limit
• One with a $1,000 limit

If you don't use the card with the $10,000 limit but you have a $500 balance on the other card, closing your card with the $10,000 limit would change your utilization ratio from 4% ($500/$11,000) to 50% ($500/$1,000).

Consider how your credit utilization will be impacted before you decide whether to close down any card. You can also contact your creditors of the cards you want to keep open and ask if they'll increase your credit line, which could help reduce the impact of the account closure.

4. How old is the card?

Average age of credit is another important factor in your credit score, accounting for 15% of your score. That means if you're closing an older card, it will have more of an impact on this component of your credit score than if you're closing a newer one.

If the card account has been open for a long time, think seriously about whether closing it is worth the hit to your credit.

5. Will you be doing any major borrowing any time soon?

Finally, think ahead to the coming few months and ask yourself if you're going to be getting a big loan like a mortgage or a car loan. If so, doing anything to reduce your credit -- like closing an old card -- probably isn't a good idea.

If you won't be doing any major borrowing for a while, though, then you have time for your score to recover. So it may be a good time to shut down the accounts you aren't using any longer -- especially if they have annual fees.