Credit cards are a convenient way to make purchases and build credit history, but with the rise of digital payments and other financial tools, many people find themselves with unused credit cards in their wallets. Should you close these unused credit cards? The answer is not straightforward, as it depends on various factors such as your credit score, the type of card, and your personal financial goals. In this article, we will explore the pros and cons of closing unused credit cards and provide some guidance on how to make an informed decision.
Firstly, let's understand what closing a credit card entails. When you close a credit card, you are effectively canceling the card and requesting that the issuer stop sending you statements and bills for that card. Closing a credit card can have several effects on your credit score:
- Immediate impact: Closing a card can result in a temporary drop in your credit score, typically between 50 and 100 points, depending on your overall credit history. This is because when a card is closed, the available credit decreases, which can affect your credit utilization ratio. However, if you have a good credit history and maintain a low credit utilization rate, the impact on your score should be minimal.
- Long-term effect: If you continue to use your other credit cards responsibly and maintain a good credit history, the temporary drop in your score should recover within a few months. Additionally, regularly monitoring your credit report can help you identify any errors or fraudulent activity that may affect your score.
Now, let's consider the benefits of closing unused credit cards:
- Reduced risk of fraud: Unused credit cards are more susceptible to fraud, as they are not being used and therefore do not generate transactions. By closing these cards, you reduce the potential for fraudulent activity on your account.
- Improved credit utilization ratio: If you have multiple credit cards with high balances, closing unused cards can help you lower your overall credit utilization ratio, which is a key factor in determining your credit score. A lower utilization ratio indicates that you are using a smaller portion of your available credit, which is beneficial for your score.
- Fewer monthly bills: Closing unused credit cards means you will no longer receive statements or bills for those cards, reducing the number of monthly expenses you need to manage.
On the other hand, there are also drawbacks to closing unused credit cards:
- Potential impact on credit score: As mentioned earlier, closing a credit card can temporarily lower your credit score, which can take several months to recover if you continue to use your other cards responsibly.
- Losing rewards and benefits: Some credit cards offer cash back, points, or other perks that can add value to your spending. If you close a card that offers these benefits, you may miss out on potential savings or rewards.
- Missing opportunities for building credit: Closing a card that has a low credit limit or a small initial deposit requirement may prevent you from building credit if you later need to apply for a larger amount or for a different type of card.
When deciding whether to close unused credit cards, consider the following factors:
- Frequency of use: If you rarely use the card, it might be worth considering closing it. However, if you use the card occasionally for specific purposes, keeping it open might be more beneficial.
- Credit utilization ratio: If you have multiple credit cards with high balances, closing unused cards can help you maintain a better credit utilization ratio, which is beneficial for your score.
- Security concerns: If you have concerns about the security of your credit card information, closing unused cards can reduce the risk of fraud.
- Financial goals: Consider your long-term financial goals when making this decision. If you plan to apply for a large loan or mortgage in the near future, keeping all your cards open might be more advantageous.
In conclusion, whether or not to close unused credit cards depends on your individual circumstances and financial goals. If you have cards that you rarely use and are not contributing to your credit score positively, closing them might be a good idea. However, if you rely on these cards for rewards or frequent use, it might be better to keep them open. Regularly reviewing your credit card usage and considering the factors mentioned above can help you make an informed decision about whether to close unused credit cards.