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If you have an old credit card sitting in the back of your wallet that you haven't swiped in years, you're probably familiar with the temptation to close a credit card. But closing an unused credit card account isn't always the best move.
In fact, unless the credit card comes with an annual fee, most experts will tell you to just leave the account open. But there are few one-size-fits-all answers when it comes to personal finance. And the question of should you close an unused credit card, or just continue to ignore it, isn't cut and dry.
Valid arguments exist for both sides of the debate. Closing a credit card can certainly hurt your score, but strategic planning can limit any damage. Closing an unused credit card could also be the right move if you're struggling to manage your credit card debt.
Your credit score is calculated based on five factors. Two of those factors can be directly affected by closing an unused credit card:
We'll look at each of these below.
Length of credit history is basically how long you've been using credit cards, and it makes up 15% of your FICO® Score. More specifically, it's influenced by the age of your oldest account (the older the better), the age of your newest account (again, older is better), and the average age of all your accounts combined.
Closing an unused credit card causes that account to stop aging, which can negatively affect your average account age and hurt your credit. If the account you close is one of your oldest accounts, that damage can be even worse.
Arguably, though, your credit utilization ratio is even more important than the length of your credit history. It's the portion of your available credit you're currently using -- how close you are to maxing out your credit cards, for example -- and it's responsible for 30% of your FICO® Score.
Your utilization rate takes into account your debt-to-credit ratio across all accounts and your individual credit card balances as compared to their limits. Most experts recommend keeping these ratios below 30%, but the lower, the better.
Unused credit cards boost your credit score by reducing your credit utilization ratio. Let's look at an example of a person's hypothetical credit utilization ratio before and after closing an unused credit card with a $0 balance and $5,000 limit.
|Total Available Credit||Total Balances||Utilization Rate|
|Before closing unused card||$20,000||$5,000||25%|
|After closing unused card||$15,000||$5,000||33%|
As you can see, in this example, closing an unused credit card caused the credit utilization ratio to rise above the 30% threshold. This would likely result in a lower credit score.
Although it's obvious that closing an unused credit card can hurt your credit score if you're not careful, some circumstances make it worthwhile anyway.
One major reason for closing an unused credit card is if that card comes with a pricey annual fee. That's not to say that all cards with an annual fee are bad -- they can be quite valuable when you make the most of them. But if you're not using the card, why are you paying for it?
Another time you may consider closing an unused credit card is if you simply don't want the temptation it represents. Every credit card you have is more credit card debt you could take on. If you struggle with managing debt, you may want to eliminate any cards you don't absolutely need.
Depending on your situation, you may be able to close an unused credit card without impacting your credit score. For example, if you have multiple credit cards with the same issuer, they may let you transfer your balance from a closed card over to your remaining card.
Consider this hypothetical: You have two credit cards with the same issuer, one with no annual fee and a $3,000 credit limit, and one with an annual fee and a $5,000 credit limit. You want to close the card with the annual fee to save money. You can request that your issuer transfer the $5,000 credit limit to your other card before closing the account. That way you end up with a single credit card with an $8,000 limit.
Transferring your credit limit to another card conserves your total available credit, which keeps your utilization rate the same. So long as the card you close isn't one of your oldest accounts, this can help your credit score remain the same after you close an unused credit card.
That being said, if the main reason you're thinking of closing an unused credit card is the annual fee, you may have other options. First, try negotiating with your issuer to waive the annual fee. Depending on how long you've had the account -- and how much the issuer wants to keep your business -- you may get a waived or reduced annual fee.
Alternatively, see if they can downgrade the card. Most cards with a high annual fee will have a lower-fee card with similar perks and rewards, and your credit card issuer may let you transform your expensive card into something more affordable.
Here are some other questions we've answered:
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