Closing an unused credit card can be a confusing topic for many consumers. With the rise of digital banking and online shopping, having multiple credit cards has become commonplace. However, some people may have credit cards that they no longer use or need. In this article, we will delve into the question: Is closing an unused credit card bad? We will explore the pros and cons of doing so and provide guidance on how to make an informed decision.
Firstly, it's important to understand what closing a credit card entails. When you close a credit card, you are effectively cancelling the card and its associated account. This means that you will no longer have access to the card and any associated benefits, such as rewards points or cashback offers. Additionally, if you have a balance on the card, you will need to pay it off before the card can be closed. Closing a credit card does not affect your credit score directly, but it can impact your credit utilization ratio, which is a factor used by lenders when evaluating your creditworthiness.
Now, let's consider 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 balance and no plans to use it, closing the card can help reduce your overall debt and make it easier to manage your finances.
2. Improved Credit Score: A lower credit utilization ratio can positively impact your credit score, as it indicates that you are using less of your available credit. This can lead to better interest rates on loans and other financial products.
3. Protection Against Fraud: If you have an unused credit card, there is a risk that it could be misused or fall into the wrong hands. Closing the card eliminates this potential risk.
Cons of Closing an Unused Credit Card:
1. Losing Rewards Programs: Many credit cards offer sign-up bonuses, cashback offers, or points programs that can be valuable for frequent shoppers or big spenders. Closing the card means losing these benefits.
2. Potential Credit Score Impact: While closing a card can improve your credit utilization ratio, it's essential to note that credit scores are influenced by many factors, including payment history, credit age, and the number of open accounts. Closing one card might not have a significant impact on your score if you have several other active cards.
3. Cost of Closing the Card: Some credit card companies charge fees to close a card, either as a flat fee or as a percentage of the remaining balance. These fees can add up, especially if you have a large balance on the card.
4. Credit History Maintenance: Closing a card can result in a gap in your credit history, which can look unfavorable to lenders. However, most lenders view short periods of no activity as normal and do not penalize you for it.
To make an informed decision about whether to close an unused credit card, consider the following factors:
1. Card Benefits: If the card offers rewards, cashback, or other exclusive benefits, weigh these against the potential costs of keeping the card open.
2. Credit Utilization Ratio: Assess your overall credit utilization ratio and determine if closing the card would improve it significantly.
3. Credit Score: Consider your current credit score and the impact of closing the card on your score. Remember that closing a card can only have a minor impact if you have several other active cards.
4. Fees: Check the terms and conditions of the card to see if there are any fees associated with closing the card.
5. Future Needs: Think about your future financial needs and whether you might need to apply for a new credit card in the future. If you think you might, it might be wise to keep the card open.
In conclusion, whether closing an unused credit card is bad depends on your individual circumstances and goals. If you have a high balance on the card and no intention of using it, closing it can be beneficial for reducing debt and improving your credit score. However, if you value the rewards or benefits offered by the card, or if you anticipate needing to apply for a new card in the future, it might be best to keep the card open. Always review your options carefully and consult with a financial advisor if needed.