If you have a credit card you’re no longer using, it might seem logical to close the account. Maybe the card doesn’t have a competitive rewards program or valuable travel perks you can use. But before you close it, it’s important to know how closing a credit card account can impact you.
With that in mind, here’s a rundown of the potential impacts of closing a credit card and when you might want to do it anyway.
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How canceling your unused credit card could hurt you
If we take a closer look at how the FICO credit scoring formula works, it’s easy to see why closing an unused credit card can have a negative impact.
First, and most significantly, 30% of your score comes from the amounts you owe. This doesn’t necessarily mean the dollar amounts of your debts, but the amounts you owe relative to your ability to borrow. For credit cards, this concept is known as “credit utilization.”
If you have $2,000 in credit card balances and $10,000 in total credit limits, you’re using 20% of your available credit. If you were to close an unused credit card that has a $2,000 limit, your total available credit drops to $8,000, and your balance now represents 25% of your available credit. Higher credit utilization has a generally negative impact on your score.
In addition, 15% of your score comes from the “length of credit history” category, which considers several time-related factors. In addition to the age of your oldest account, this category also considers the average age of all of your credit accounts. If the card you close has been on your credit report for a long time, it could be a positive influence on this category, and closing a long-established credit account can cause your score to dip temporarily.
Reasons you might want to cancel anyway
Before we go any further, in most cases, the impact to your score from canceling an unused credit card is likely to be modest and short-lived. In other words, if you have a strong credit score now, closing an unused credit card is unlikely to drop your score to an extent that it affects your ability to get another credit card or qualify for competitive interest rates.
This is especially true if you have several other credit card accounts in good standing and with reasonably low balances. So, the impact on your score isn’t the only factor to keep in mind.
And while it’s generally a smart idea to keep an unused credit account open, there are some cases where it can certainly make sense to close it and absorb the temporary ding to your credit score.
- Your unused credit card has an annual fee and you aren’t getting value from it. As an example, I have a travel credit card I don’t use much that costs about $200 per year. However, the card offers free checked bags for my preferred airline for me and anyone traveling with me. I estimate this perk saves me and my family at least $500 per year in bag fees, so I keep the card.
- You have too many credit cards to effectively keep track of. There’s no sense in feeling overwhelmed by credit cards for the sake of avoiding a small dip in your credit score.
The bottom line
If you have an unused credit card, it’s important to know the potential impact from closing the account as well as the reasons you might want to do it anyway. Like most personal finance decisions, there’s no one-size-fits-all best course of action, so be sure to weigh the pros and cons before deciding what’s best for you.
