When you’re examining your finances, you might be tempted to get rid of any credit cards or accounts that you aren’t using anymore. However, “decluttering” your wallet by canceling unused credit cards can be a risky move in many cases.
Perhaps you’ve paid off credit card debt thanks to economic stimulus payments or your spending habits have simply changed. Here’s what you should know about canceling credit cards.
Why canceling credit cards can hurt your credit score
If you’re thinking about canceling your old, dusty credit cards, it might pay to think twice. The main reason to keep an unused credit card open is to protect your credit score.
Closing an old credit card impacts your credit utilization ratio (how much of your available credit you’re using). A higher credit utilization ratio usually results in a lower credit score. Credit utilization ratios make up about 30 percent of your FICO score.
For example, if you have three credit cards totaling a $10,000 credit limit and you usually carry a balance of $3,000, you’re at the recommended 30 percent utilization ratio. But if you close one card with a limit of $4,000, you’ll have a credit limit of $6,000 and thus jump to a 50 percent utilization ratio.
Length of credit history
Although many people think that closing old credit accounts erases the associated credit history, this is largely a myth, according to Ethan Dornhelm, the vice president of scores and predictive analytics at FICO, according to The Wall Street Journal. Credit history on closed accounts remains on your credit reports for 7–10 years.
Reasons to close an unused credit card
There are several good reasons to close an unused credit card, even though you might need to improve your credit score afterward.
If you’re going through a divorce or separation, it’s wise to close any joint credit cards.
If the credit card has high annual fees and you’re getting no benefits like cash back rewards, closing it is probably best.
If you’re tempted to overspend, keeping old credit cards active might be dangerous. You know yourself and your spending triggers. If having the extra available credit might lead you into debt, closing unused cards could be worth any potential damage to credit scores.
An alternative to closing due to a high annual fee may be to call the card company to request a switch to a low-fee or no-fee card. Ted Rossman of Bankrate.com states that you can frame this as a “product change” and ask the company to roll over your existing credit history to the new card, according to The Wall Street Journal.
How to protect your credit score when closing credit cards
Credit specialist John Ulzheimer suggests using an older card for a recurring purchase and then paying the balance immediately to maintain the benefits of the card, according to The Wall Street Journal.
If you're closing a card permanently, be sure to pay off the remaining balance and redeem any leftover rewards first. It’s best to confirm this by phone with the card company and send a certified letter to cancel the account. Also, follow up with the three credit reporting bureaus 30–45 days after closing to confirm that the information is all correct.