Understanding the nuances of how closing an unused credit card can impact your credit score is an essential aspect of financial health.
At a Glance
- Closing an unused card can increase credit utilization ratio, negatively affecting your score.
- The age of your credit accounts impacts your score; closing an old card can reduce your average account age.
- Each financial decision, including closing a credit card, should consider personal benefits versus risks.
- Poor credit management can have long-term effects on financial opportunities.
Impacts of Closing an Unused Credit Card
Closing an unused credit card could negatively impact your credit score due to increased credit utilization and changes in the average age of your accounts. The FICO® Score, a measure most strongly affected by credit utilization, will likely see a dip when a card closure reduces your total available credit. This metric represents around 30% of your credit score’s calculation. Understanding how these factors interconnect is essential for maintaining your credit health.
“Experts recommend keeping your credit utilization below 30% at all times, and the lower, the better,” says Experian’s Brianna McGurran.
Older credit accounts lend stability to your credit profile. When you close an older card, it has the potential to lower the average age for your total accounts, thereby impacting the credit length component, which makes up 15% of your score. If the card also contributes to a significant portion of available credit, closing it can temporarily affect available credit limits and overall scoring.
Evaluating the Decision: Closing Versus Keeping
The key to a wise financial decision lies in evaluating individual needs against potential drawbacks. Review your credit history, financial goals, and card-specific details like fees before making a choice. Keeping an unused card may be advantageous if it doesn’t carry fees and could help when applying for mortgages or loans in the future. Each person’s financial landscape is unique.
“Every financial decision is a personal one,” according to Brianna McGurran.
Before proceeding with cancellation, consider factors such as age, credit limit, and personal spending habits. Pay outstanding balances, remove any recurring charges, and inform your issuer about your decision to cancel the card. If you wish to keep the card but avoid inactivity, small recurring payments or sporadic use can prevent involuntary account closure.
So apparently closing a credit card can hurt your credit score, but so does opening a new one. You should have multiple cards but not too many or else… https://t.co/FjqtSjJbv9 pic.twitter.com/yl9uISGTXt
— Ivan Alcantara (@ivancalcantara) March 15, 2024
Maintaining Financial Health
Effective credit management entails making informed choices about keeping or closing credit cards. Balancing credit utilization and credit history age can help maintain a stable score. When used correctly, credit accounts offer opportunities for favorable loan terms and other benefits. Regular assessments of your financial health can help you remain on track with credit goals.
“The “right” number of credit cards varies from one person to the next.” according to Bankrate.com
Building and maintaining a good credit score can open doors to financial opportunities, while poor management might close them. Keeping or closing credit cards should align with a comprehensive view of your financial strategy, ensuring long-term success and stability. Evaluate your needs, track your score regularly, and modify habits as necessary.
“Every financial decision is a personal one,” says Brianna McGurran at Experian.
