Credit cards are a convenient way to make purchases and build credit, but with the plethora of options available, it's easy to accumulate unused cards. One such card might be a rewards card that you signed up for but never use. Should you close this credit card? The answer isn't straightforward, as there are several factors to consider.
Firstly, let's examine the benefits of having an unused credit card. Some cards offer sign-up bonuses or introductory offers that can provide immediate value. Additionally, these cards may have perks like extended warranty coverage, travel insurance, or discounts on specific merchants. If you're not using these benefits, it might be worth keeping the card open just for the potential future benefit.
However, there are also downsides to having an unused credit card. For one, each unused card contributes to your credit utilization ratio, which is the percentage of your total available credit that you're using. A high credit utilization ratio can lower your credit score, making it harder to qualify for loans or credit cards in the future. If you're not using the card, it's better to close it to reduce your utilization ratio.
Another factor to consider is the impact on your credit report. Each account you have contributes to your credit history, and if you have many unused accounts, it can look bad to lenders. Closing unused accounts can help improve your overall credit health and make it easier to get approved for new credit.
On the other hand, some people argue that having multiple credit cards can actually improve your credit score by demonstrating responsible credit management. This is because having a mix of different types of credit (e.g., revolving, installment) and length of credit history can show lenders that you can handle different types of debt obligations. However, this argument is less relevant today due to the widespread use of FICO Score 8, which focuses more on the utilization rate and the age of your oldest account than the number of accounts.
If you decide to close an unused credit card, there are a few steps you should take:
- Check the terms: Before closing a card, read the terms and conditions carefully. Some cards have fees associated with early closure or require a minimum balance to remain open.
- Contact the issuer: Notify the credit card company directly that you want to close the account. You can usually do this online or by calling their customer service number.
- Update your records: Once the card is closed, update your records to reflect the change. This includes removing the card from your list of active credit cards and updating any spreadsheets or budgeting tools you use to track your finances.
- Monitor your credit: After closing the card, monitor your credit reports regularly to ensure that the account has been removed and no errors have occurred. You can do this by ordering your free credit reports from AnnualCreditReport.com once a year.
In conclusion, whether or not to close an unused credit card depends on your individual circumstances and financial goals. If you're not using the card's benefits and it's contributing to a high credit utilization ratio, it might be wise to close it. However, if you believe the card could provide future value or demonstrate responsible credit management, you might choose to keep it open. Always weigh the pros and cons and make informed decisions based on your unique financial situation.