Credit cards are a popular financial tool that many people use to make purchases, build credit scores, and earn rewards. However, with the rise of digital payments and other alternative payment methods, some cardholders may find themselves with unused credit cards collecting dust in their wallets. One common question among these individuals is whether it's better to close a credit card or let it go inactive. This article will delve into the pros and cons of both options and provide guidance on how to make an informed decision based on your personal financial situation and goals.
Firstly, let's clarify what it means for a credit card to be closed versus inactivated. When you close a credit card, it means you permanently cancel the card and it cannot be reopened under the same account. On the other hand, when a credit card goes inactive, it means the card has not been used for a certain period of time (usually six months), and as a result, the issuer may automatically place it into a dormant status. In this state, the card can still be reactivated if there is activity on the account.
Now, let's explore the advantages and disadvantages of closing a credit card:
Advantages of Closing a Credit Card:
1. Eliminates Debt: If you have a balance on your credit card, closing it can help you eliminate that debt faster than paying it off over time.
2. Prevents Misuse: If you have concerns about misusing the card or unintentionally accumulating debt, closing it can prevent further issues.
3. Reduces Exposure: By closing a card, you reduce the number of potential points of vulnerability in your credit report, which can help improve your overall credit score.
4. Improves Credit Utilization Ratio: Closing a card can lower your total credit utilization ratio, which is a key factor in determining your creditworthiness.
Disadvantages of Closing a Credit Card:
1. Negative Impact on Credit Score: Closing multiple cards in a short period can potentially cause a drop in your credit score, especially if you have a low credit history.
2. Loss of Rewards: Some credit cards offer sign-up bonuses, cashback, or other rewards programs. Closing a card before fulfilling its terms could result in losing out on these benefits.
3. Difficulty Reactivating: If you need to use the card again in the future, you may face challenges reactivating it, especially if you have a short history of using the card.
Now, let's examine the pros and cons of letting a credit card go inactive:
Advantages of Letting a Credit Card Go Inactive:
1. Maintains Credit History: Keeping the card active but unused helps maintain a longer credit history, which can be beneficial for building credit and improving your credit score.
2. Potential Rewards: Some cards offer ongoing rewards or benefits even if they are not being actively used. By keeping the card inactive, you can continue to earn these rewards without any additional effort.
3. Convenience: Having an inactive card available can be useful if you occasionally need to make large purchases or want to take advantage of special promotions without having to apply for a new card.
Disadvantages of Letting a Credit Card Go Inactive:
1. Risk of Fraud: If you let your card go inactive, there is a risk that someone could use it fraudulently, especially if you share your account details with others.
2. Higher Interest Rates: Some issuers may charge higher interest rates on inactive cards, which can lead to additional costs if you decide to use the card later.
3. Difficulty Reactivating: As mentioned earlier, reactivating an inactive card can sometimes be challenging, especially if you have a short history of using the card.
To make an informed decision on whether to close or let your credit card go inactive, consider the following factors:
1. Current Balance: If you have a significant balance on the card, closing it may be the best option to eliminate debt quickly.
2. Frequency of Use: If you rarely use the card and don't plan to in the near future, letting it go inactive might be more convenient.
3. Credit Score: Closing multiple cards in a short period can negatively impact your credit score. If you have a good credit score and only one or two cards to close, it might be safer to keep them active.
4. Rewards Programs: If you rely on rewards from your card and don't plan to replace it with another card offering similar benefits, keeping it active might be the best choice.
5. Security Concerns: If you have concerns about the security of your card information, closing it might be a safer option.
In conclusion, whether to close a credit card or let it go inactive depends on your individual financial situation and goals. If you have a high balance and want to eliminate debt quickly, closing the card may be the best choice. However, if you use the card occasionally and value the rewards program, keeping it active might be more beneficial. It's essential to weigh the pros and cons and make a decision that aligns with your financial priorities and risk tolerance.