Should You Close An Unused Credit Card? Pros & Cons Explained
Deciding whether to close an unused credit card is not a straightforward decision. It depends on various factors, such as financial habits, credit score impact, and card benefits. Here's a detailed breakdown to help you make an informed choice.
Benefits of Keeping an Unused Credit Card
1. Helps Maintain Credit Score
Unused credit cards help maintain a low credit utilisation ratio, which positively impacts your credit score. This is crucial for future borrowing opportunities.
2. Preserves Credit History
Older credit cards add to the average age of your credit accounts. Closing them can shorten this average, potentially lowering your score.
3. Zero Maintenance Cost
If the card doesn't have an annual fee, keeping it open is virtually cost-free while still contributing to your creditworthiness.
4. Emergency Backup
Unused cards serve as financial safety nets during unexpected expenses, offering peace of mind in emergencies.
5. Hidden Perks
Many credit cards offer additional benefits, such as purchase protection, extended warranties, or exclusive discounts, which can be useful even without frequent usage.
When to Consider Closing the Card
1. High Annual Fees
If your card charges hefty fees and its benefits remain unused, it might not justify the cost.
2. Overspending Risk
For individuals prone to overspending, keeping fewer cards may help manage finances better.
3. Simplifying Finances
Too many cards can make financial management cumbersome. Closing a less useful one can streamline things.
Steps to Take Before Closing
If you decide to close your card, ensure the following steps
1. Downgrading
If your card has an annual fee, check if the issuer offers a no-fee alternative. This way, you can maintain your credit history and benefits without added expenses.
2. Occasional Use
Make a small purchase occasionally to keep the card active and demonstrate usage, helping avoid any unexpected closures by the issuer.
Before closing an unused credit card, evaluate its relevance to your financial goals. For example, a card with travel perks might be worth keeping if you occasionally travel, even if it’s not used regularly. Always balance the potential benefits against the costs and credit score implications.
Benefits of Keeping an Unused Credit Card
1. Helps Maintain Credit Score
Unused credit cards help maintain a low credit utilisation ratio, which positively impacts your credit score. This is crucial for future borrowing opportunities.
2. Preserves Credit History
Older credit cards add to the average age of your credit accounts. Closing them can shorten this average, potentially lowering your score.
3. Zero Maintenance Cost
If the card doesn't have an annual fee, keeping it open is virtually cost-free while still contributing to your creditworthiness.
4. Emergency Backup
Unused cards serve as financial safety nets during unexpected expenses, offering peace of mind in emergencies.
5. Hidden Perks
Many credit cards offer additional benefits, such as purchase protection, extended warranties, or exclusive discounts, which can be useful even without frequent usage.
When to Consider Closing the Card
1. High Annual Fees
If your card charges hefty fees and its benefits remain unused, it might not justify the cost.
2. Overspending Risk
For individuals prone to overspending, keeping fewer cards may help manage finances better.
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3. Simplifying Finances
Too many cards can make financial management cumbersome. Closing a less useful one can streamline things.
Steps to Take Before Closing
If you decide to close your card, ensure the following steps
- Redeem Rewards: Utilise any points, cash back, or miles to avoid losing them.
- Monitor Credit Utilisation: Closing a card with a high limit can increase your credit utilisation ratio, so consider how it affects your overall financial picture.
- Explore Downgrades: Many card issuers allow downgrades to no-fee versions, letting you retain the credit line without ongoing costs.
1. Downgrading
If your card has an annual fee, check if the issuer offers a no-fee alternative. This way, you can maintain your credit history and benefits without added expenses.
2. Occasional Use
Make a small purchase occasionally to keep the card active and demonstrate usage, helping avoid any unexpected closures by the issuer.
Before closing an unused credit card, evaluate its relevance to your financial goals. For example, a card with travel perks might be worth keeping if you occasionally travel, even if it’s not used regularly. Always balance the potential benefits against the costs and credit score implications.
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