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Holding onto unused credit cards can feel like a harmless choice, but it might be affecting your finances more than you realise. Deciding whether to close unused credit cards is not just about simplifying your wallet; it’s a decision that can influence your credit score, debt levels, and future financial flexibility. Before making that call, understanding the pros, cons, and long-term effects on your financial health is crucial. Whether you're looking to improve your credit score or cut unnecessary costs, it's important to weigh the impact carefully.
People often choose to close unused credit cards to avoid unnecessary financial risks. Even when not in use, credit cards can tempt overspending or incur high interest rates and annual fees. If a card offers no rewards or benefits, continuing to pay these fees can feel like a waste.
Additionally, many prefer to simplify finances by closing accounts they no longer use. Keeping track of multiple cards can be confusing and closing them reduces clutter. Lastly, closing unused cards helps reduce the risk of fraud, as dormant accounts are more vulnerable to unauthorized activity.
Here’s how closing unused credit cards can directly affect your credit score:
Credit Utilisation Ratio
Closing a credit card lowers your available credit limit, which may raise your credit utilisation ratio and negatively affect your credit score.
Credit History Length
If you close an older card, it shortens your credit history, which can hurt your score since a longer history is viewed more favourably.
Hard Inquiry Risk
If you apply for a new credit card after closing an old one, the hard inquiry may lower your score temporarily.
Potential Score Drop
Closing unused credit cards can lead to a score drop, particularly if your credit utilisation or length of credit history is affected.
Credit Mix Impact
Closing a credit card might affect your credit mix, as having a variety of credit types—credit cards, loans, etc.—can positively impact your score.
Here are the potential benefits of closing unused credit cards:
Reduced Annual Fees
Closing unused credit cards eliminates the need to pay annual fees, which can save money, especially if the card offers no rewards or benefits.
Simplified Financial Management
By closing unused credit cards, you can simplify your finances, making it easier to track your spending and manage fewer accounts.
Less Risk of Fraud
Inactive credit cards are more vulnerable to fraud and closing them reduces the chances of unauthorised charges or identity theft.
Improved Financial Focus
Closing unused cards can help you focus on the credit accounts that matter most, encouraging smarter financial decisions and reducing temptation to overspend.
Avoid Accumulating Debt
Closing unused credit cards removes the temptation to make unnecessary purchases, helping to prevent you from racking up debt on cards you don’t need.
Here are the potential drawbacks of closing unused credit cards:
Shortened Credit History
Closing an old unused card can reduce the length of your credit history, which can negatively affect your credit score.
Higher Credit Utilisation
By closing a credit card, your total available credit decreases, potentially increasing your credit utilisation ratio and lowering your credit score.
Reduced Credit Mix
Closing an unused credit card might impact your credit mix, which could harm your credit score if you have limited types of credit accounts.
Loss of Potential Rewards
If the unused card offers rewards or cashback, closing it means losing out on the opportunity to earn those benefits in the future.
Impact on Credit Score when Reapplying
Closing a credit card could make it harder to get approved for new credit in the future, as it may impact your credit score.
Here are key factors to help you decide if closing your unused credit card is the right move:
If your unused card charges high annual fees and offers no rewards, closing it can save you money
A high credit score may not be greatly affected by closing an unused card, but if your score is low, it’s best to keep the card open
If you're aiming to reduce debt or simplify finances, closing the card could be a good decision, but it may hinder credit score improvement
If you carry balances on other cards, closing an unused card could raise your credit utilisation ratio, which may negatively affect your score
If the unused card is older, keeping it open helps maintain a longer credit history, which can benefit your credit score
Closing an unused card could impact your ability to get approved for future credit, as it may reduce your available credit and affect your credit mix
If the unused card offers any special benefits, such as extended warranties or travel insurance, it might be worth keeping open for future use
Here are some alternatives to closing an unused credit card that can help you avoid potential downsides:
Request a Credit Limit Reduction
If you're concerned about overspending, ask your card issuer to reduce your credit limit, helping you manage your spending without closing the account.
Negotiate for No Annual Fees
If your card charges an annual fee, contact your issuer to request a fee waiver or ask for a more affordable option.
Use the Card Occasionally
To maintain your credit history and keep your credit utilisation ratio in check, make small purchases on your unused card every few months.
Convert the Card to a No-fee Option
Some issuers may allow you to switch to a no-fee version of the card, so you can keep it open without the additional cost.
Set Up Alerts for Inactivity
If you want to avoid forgetting about the card, set up reminders or alerts for occasional use, ensuring the card stays active without overspending.
Here’s how to properly close an unused credit card:
Pay off your balance completely before closing the card to avoid interest charges and fees
Redeem any rewards or cashback before closing the account, as you may lose access to them once it’s closed
Call your credit card issuer to formally close the account, rather than just stopping usage, ensuring the closure is properly recorded
Monitor your credit report after closing the card to make sure it is marked as "closed by consumer" and not "closed by issuer"
Cut up the card or destroy it to prevent any future accidental use
Your debt-to-income ratio (DTI) measures how much debt you have in relation to your income. Closing unused credit cards can indirectly affect your DTI by reducing your total available credit. If you carry balances on other cards, this could make you appear more reliant on debt. Keeping unused credit cards open helps maintain a lower DTI, as it shows lenders you have more credit available, potentially making you seem less risky. This could benefit your chances when applying for loans or credit in the future.
It’s often better to let a credit card go inactive rather than close it. Inactivity can still help you maintain a good credit history without impacting your credit score as much as closing the account would. However, be mindful of any fees.
It depends on your financial goals. If your goal is to improve or maintain your credit score, keeping the card open might be beneficial. However, if the card has high fees and no rewards, cancelling it might be a better choice.
The 2/3/4 rule suggests having no more than two credit cards at once. It also recommends applying for no more than three credit cards in a year and limiting your total credit card holdings to four cards. This helps maintain a healthy credit score by ensuring you don’t accumulate too much debt.
Closing an unused credit card can hurt your credit score by increasing your credit utilisation ratio and decreasing the length of your credit history.
It depends on the fees and your financial goals. If the card has an annual fee and offers no benefits, you might want to cancel it. However, if it has no fees or you want to maintain your credit history, keeping it open might be a better option.
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Posted on 16 May
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