Credit cards are a convenient way to make purchases and build credit history. However, with the rise of digital wallets and other payment methods, many people find themselves with unused credit cards in their wallets. Some even have multiple credit cards that they never use. The question then arises: is it smart to close a credit card you don't use?
Before we dive into the answer, let's understand why some people might have unused credit cards. Firstly, there could be a misunderstanding about how credit cards work. Many people believe that closing a credit card will erase all the debt associated with it. This is not true. Closing a credit card does not cancel the balance owed on it; instead, it simply prevents further use of the card. If you have a balance on your card, you must pay it off before closing the account.
Now, onto the main question: is it smart to close a credit card you don't use? The answer is not straightforward and depends on several factors. Let's explore the pros and cons of closing an unused credit card:
Pros of Closing an Unused Credit Card:
1. Reduced Credit Card Debt: If you have a credit card with a high-interest rate or a large balance, paying it off can save you money in the long run. Closing the card ensures that you won't continue accruing interest on the outstanding balance.
2. Protection Against Fraud: If you have an unused credit card, it may be more susceptible to fraudulent activity. By closing the card, you reduce the risk of unauthorized charges being made on your account.
3. Improved Credit Score: Closing unused credit cards can help improve your credit score by reducing the number of open accounts and overall credit utilization ratio. A lower credit utilization ratio indicates that you are using less of your available credit, which is beneficial for your credit score.
Cons of Closing an Unused Credit Card:
1. Losing Credit History: Closing a credit card means losing its history. While this history doesn't directly affect your credit score, it provides lenders with information about your financial behavior over time. If you close a card with a long history, you might lose valuable data points that could otherwise be used to build your credit history.
2. Potential Impact on Credit Utilization Ratio: Closing a credit card could increase your overall credit utilization ratio if you have other cards with high balances. This could negatively impact your credit score, especially if you have a low credit limit on your remaining cards.
3. Missing Out on Rewards: Some credit cards offer rewards programs that can be valuable for frequent travelers or big spenders. If you close a card that offers these rewards, you might miss out on potential savings or perks.
4. Potential Fees: Closing a credit card may come with fees, either from the issuer or from the bank that processes the transaction. These fees could offset any benefits you gain from closing the card.
In conclusion, whether it's smart to close a credit card you don't use depends on your individual circumstances. If you have a high-interest rate or a large balance on the card, closing it could save you money and protect you from fraud. However, if you value the rewards offered by the card or prefer to keep all your credit card history intact, closing the card might not be the best choice. It's essential to weigh the pros and cons and make a decision based on your specific needs and priorities.
If you decide to close a credit card, follow these steps:
- Contact the credit card issuer to request the closure of the account.
- Ensure that you have paid off any outstanding balance on the card before closing it.
- Review your credit card statements to ensure there are no unauthorized charges or errors.
- Consider transferring any remaining balances to another card with better terms or rewards programs.
- Cancel any automatic payments set up on the card to avoid late fees or missed payments.
- Keep a record of the closure date and details for future reference.
In summary, while closing an unused credit card can have benefits such as reduced debt and improved credit scores, it's essential to consider the potential drawbacks like missing out on rewards and losing credit history. Deciding whether to close a credit card should be based on your personal financial goals and priorities.