Credit cards can be a convenient financial tool, but with rising costs and increasing interest rates, you may consider closing unused cards. However, it’s important to evaluate how this decision could impact your credit score and overall financial health.
When to Consider Closing the Card?
1. High Annual Fees: You could potentially save money by discontinuing your credit card if you rarely utilize its rewards or perks and it has high annual fees.
2. No Longer Useful: It could be wiser to cancel the card if its benefits no longer correspond with your purchasing patterns or if it no longer supports your financial aims.
3. Simplify Your Finances: Keeping track of several cards can be complicated and raise the risk of missing payments. It may be simpler to handle finances if an unused card is deactivated.
4. Avoid Unnecessary Debt: Closing the card can assist you in staying within your spending limits and avoiding debt accumulation if you are tempted to overspend.
What Happens When You Close a Credit Card?
1. Impact on Credit Utilization: While you keep spending, closing a card will cause your credit usage ratio to rise and your total available credit to decrease which could lower your credit score.
2. Reduced Emergency Credit Access: Having fewer credit cards means less available credit for emergencies. If unexpected expenses arise, you might have less flexibility to cover them.
3. Missed Rewards: Losing rewards or benefits like cashback or points could happen if you close a credit card, even if you don't use it often.
4. Shortened Credit History: When you close an old credit card, your credit history becomes shorter. Lenders often favor lengthier credit histories because they demonstrate a continuous track record of credit management over time.
5. Loan Approval: Closing a card could limit your available credit, possibly making it harder to get approved for future loans or mortgages.
Steps to Take If You Decide to Close the Card
If you decide to cancel your unused credit card, follow these key steps:
Pay Off Any Outstanding Balance: Before canceling your credit card, be sure that any outstanding bills are settled. Leaving any balance on your credit card when closing it can lower your credit score and complicate the closure process.
Check for Penalties or Fees: Verify the terms of your card to avoid any penalties or hidden fees when closing it. Some cards might charge a fee for closing within a certain time frame.
Request a Written Confirmation: When you close a credit card, ask for written confirmation that the account has been closed and that there’s no outstanding balance. This will protect you in case there are any discrepancies in your credit report later on.
Deciding whether to keep or close an unused credit card is a decision that requires careful thought. While closing the card might be tempting to avoid fees or simplify your finances, it’s important to consider how it will affect your credit score and overall financial health.
