Credit cards are a convenient way to make purchases and build credit history, but with the rise of digital banking and online shopping, many people have accumulated a collection of unused or inactive credit cards. While some may view these cards as clutter, others might wonder if it's better to close them altogether. This article will delve into the pros and cons of closing inactive credit cards and provide insights on how to manage your credit card portfolio effectively.
Firstly, let's understand what constitutes an inactive credit card. An inactive credit card is one that has not been used for a significant period, usually six months or more. It could be due to changes in spending habits, loss of the physical card, or simply forgetting to use it. Closing an inactive credit card can seem like a straightforward decision, but there are several factors to consider before making a decision.
Benefits of Keeping Inactive Credit Cards
1. Security: One of the primary reasons to keep an inactive credit card is security. If you have lost your physical card, having the account still open ensures that no unauthorized transactions can take place. Additionally, some banks offer fraud protection services that cover lost or stolen cards, which can be beneficial.
2. Credit History: Even if you haven't used an inactive credit card for a long time, it still contributes to your overall credit history. Lenders look at your credit history when evaluating your creditworthiness, and having multiple accounts can help build a diverse credit profile.
3. Potential Rewards: Some credit cards offer rewards programs that can be valuable, even if you don't use the card frequently. Keeping an inactive card can ensure that you continue to earn rewards points or cash back on your other purchases.
Concerns About Closing Inactive Credit Cards
1. Credit Utilization Ratio (CUR): Closing an inactive credit card can lower your CUR, which is the percentage of your total available credit that you're using. A lower CUR can improve your credit score, as it indicates that you're managing your debt well. However, if you close too many cards, it could also indicate a lack of financial discipline and negatively impact your credit score.
2. Credit Age: The age of your credit accounts is another factor that lenders consider. Older accounts tend to carry more weight than newer ones, so keeping an inactive card can help increase the age of your credit history, which is beneficial for your credit score.
3. Credit Mix: Having a mix of different types of credit (e.g., revolving, installment) and length of credit history can help improve your credit score. Closing all inactive cards might result in a lack of diversity in your credit portfolio, which could harm your score.
Deciding Whether to Close Inactive Credit Cards
The decision to close an inactive credit card should be based on your personal circumstances and financial goals. Here are some factors to consider:
1. Frequency of Use: If you haven't used the card in a long time and don't plan to, it might be best to close it. However, if you occasionally use the card for specific benefits or rewards, it might be worth keeping it open.
2. Security Concerns: If you have concerns about the security of your account, especially after losing the physical card, closing the account might be a good idea. However, if you have set up alerts or monitoring for fraudulent activity, you might decide to keep the card open.
3. Credit Score: As mentioned earlier, closing inactive cards can improve your credit score by reducing your CUR and increasing the age of your credit history. However, if you have a low credit score and need to improve it, closing too many cards could hurt your score more than help it.
4. Financial Goals: If you have a goal to pay off debt faster or reduce monthly payments, closing inactive cards can help you focus on paying down the balances on your active cards. However, if you rely on the rewards or benefits offered by the inactive card, you might want to keep it open.
Conclusion
In conclusion, whether to close inactive credit cards depends on various factors such as frequency of use, security concerns, credit score goals, and financial objectives. It's essential to weigh the pros and cons and make a decision that aligns with your personal needs and financial goals. If you're unsure, consulting with a financial advisor or credit counselor can provide personalized advice tailored to your unique situation. Remember, managing your credit wisely can lead to improved financial health and opportunities in the future.