Credit cards are a convenient way to make purchases, but with the rise of digital payments and other financial alternatives, many people find themselves with unused credit cards. While some may choose to cancel these unused cards, others might prefer to keep them for potential future use or as a backup in case of emergencies. So, is it better to cancel unused credit cards or keep them? This article will delve into the pros and cons of both options to help you make an informed decision.
Firstly, let's examine the benefits of keeping unused credit cards. One significant advantage is that they can serve as a safety net in case of emergencies. For instance, if you lose your wallet or your primary card gets stolen, having an extra credit card on hand can be a lifesaver. Additionally, some credit cards offer extended warranty coverage on purchases, which can be beneficial if you frequently buy electronics or other items with a high cost of replacement.
Another reason to keep unused credit cards is that they can help build credit history. Each time you use your credit card, it reports to the credit bureaus, and this activity contributes to your credit score. If you have several unused credit cards, using one occasionally can help increase your available credit and potentially improve your score. However, it's essential to note that not all unused cards contribute positively to your credit history. Some issuers may report utilization rates as zero, which can negatively impact your score. Therefore, it's crucial to select cards that report activity accurately.
On the other hand, there are several reasons why some people choose to cancel unused credit cards. The most obvious benefit is cost savings. Unused credit cards often come with an annual fee, which can add up over time if you're not using the card regularly. By canceling these cards, you can save money and avoid unnecessary fees. Moreover, if you have multiple unused cards, canceling them can simplify your financial management and reduce the risk of identity theft or fraud.
Another factor to consider when deciding whether to cancel unused credit cards is the impact on your credit utilization ratio. Your credit utilization ratio is the amount of credit you use compared to your total available credit. A high utilization ratio can lower your credit score, while a low ratio can improve it. If you have several unused cards, using them sporadically could lead to a higher utilization ratio, which could negatively affect your score. However, if you cancel unused cards and focus on using a smaller number of cards more consistently, you can maintain a healthy utilization ratio.
Lastly, it's worth considering the impact on your credit score when deciding whether to cancel unused credit cards. While some issuers may report utilization rates as zero, others may still count the account as active and contribute to your overall credit history. If you cancel a card that contributes positively to your score, it could result in a decrease in your score. On the other hand, if you cancel a card that doesn't contribute positively, it won't have a significant impact on your score. Therefore, it's essential to evaluate the individual impact of each card on your score before making a decision.
In conclusion, whether to cancel unused credit cards or keep them depends on your personal circumstances and financial goals. If you have several unused cards and want to save money, canceling them might be the best option. However, if you value the potential benefits of extended warranty coverage or the ability to build credit history, keeping some unused cards might be beneficial. It's also essential to consider the impact on your credit utilization ratio and credit score when making a decision. By weighing these factors, you can make an informed choice that aligns with your financial goals and priorities.