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Unused Credit Cards – Should You Close the Accounts or Keep Them?

Credit cards are a popular way for people to make purchases. They’re so popular that the average American has more than four credit card accounts open at any one time according to the 2019 Experian Consumer Credit Review, as reported by CNBC.

Keeping track of your credit cards can get difficult if you have a lot of them. If you’ve replaced an old credit card with a new one and find yourself not using the old card anymore, you might think about closing the account.

Before you do, it’s important to understand the impact closing an existing credit card account will have on your credit.

How a Credit Score is Calculated

Your credit score is a numerical score that lenders can use to gauge how trustworthy you are as a borrower.

Three major credit bureaus — Experian, Equifax, and Transunion — track your interactions credit and debt and compile that information into a credit report. They then use the information in their report to produce a credit score for you.

Most lenders and credit bureaus use credit scoring models designed by FICO. Often, people will use the terms FICO score and credit score interchangeably. Your score can range from a low of 300 to 850, with higher scores being better.

When you apply for a new loan or credit card, the lender will ask one or more of the credit bureaus for a copy of your credit report. It then uses the information in that report along with the information included in your application to make its lending decision.

The higher your credit score, the better your odds of qualifying for a loan or credit card. Having a higher credit score also entitles you to more favorable interest rates on loans such as auto loans and home mortgages.

The FICO scoring formula uses five factors to determine your credit score:

1. Payment History

Your payment history is the most important part of determining your credit score. Every time you make a payment on or before its due date, it helps your score. Missed and late payments hurt your score.

One missed or late payment tends to have a much larger impact on your score than one timely payment, so always paying bills by their due dates is essential to building good credit.

2. Credit Utilization

Credit utilization looks both at the total amount of debt you have and your credit card balances compared to your credit limits. Closing an old credit card reduces the total credit limit available to you, which means it can impact this aspect of your credit score.

In general, the less debt you have, the better your score will be.

3. Length of Credit History

The length of your credit history measures both the amount of time you’ve had access to credit and the average age of your credit accounts. This factor is also affected by closing an old credit card.

The longer you’ve had access to credit and the older your average credit account is, the better it is for your credit score.

4. Credit Mix

Credit mix looks at the different types of credit that you have experience with. For example, mortgages are different from credit cards, which are different from student loans, even if they’re all types of loans.

Having experience with different types of credit will give your score a boost.

5. New Credit Applications

When you apply for a new loan or credit card and a lender asks a credit bureau for a copy of your credit report, that credit bureau makes a note of that inquiry.

Each inquiry drops your score by a few points, so it’s important to only apply for loans and credit cards that you need.

How Closing a Credit Card Impacts Your Credit

Closing an old credit card account affects two portions of your credit score: your credit utilization and the average age of your credit accounts.

It Reduces Your Credit Utilization Rate

One of the things your credit utilization measures is the amount of credit card debt you have compared to the combined credit limits of your credit cards. Closing an account will reduce the combined limits of your cards, which may drop your score if you have outstanding credit card debt.

For example, if you have $5,000 in credit card balances and $20,000 in total credit limits, your credit utilization is 25%, which is generally reasonable.

If you close an old, unused card with no balance and a $10,000 credit limit, your total remaining credit limits will drop to $10,000 and your credit utilization will spike to 50%. This isn’t terrible, but it will cause a drop in your score.

Your credit utilization is calculated each time you receive a new statement from your card issuer, so if you tend to put a lot of charges on your credit cards, closing one card can cause you to have higher utilization rates after each statement, even if you don’t carry a balance.

The higher the credit limit of the card you’re thinking about closing, the bigger the impact closing the account will have on your credit utilization.

It Shortens Your Average Age of Credit

Closing an old credit card will also drop the average age of your accounts. Lenders generally like to see borrowers that don’t jump from account to account frequently, so the older your average account is, the better it is for your score.

For example, say you have three credit cards — one that’s been open for five years, one for three years, and one for a single year. The average age of your accounts is three years. If you close your oldest card, the average age of your remaining open accounts will drop to just a year and a half.

The older the account you close and the fewer other cards you have, the more closing the account will drop your score by reducing the average age of your credit accounts.

Should You Close an Old Credit Card?

If you’re thinking about closing an old credit card, consider these questions:

How Much Will It Impact Your Credit Score?

FICO doesn’t publish the formulas it uses to calculate your credit score, so you can’t know for certain how closing a credit card will affect your credit score. However, you can make some educated guesses based on the information that you do have.

In general, the older a card is and the higher its credit limit, the more impact it has on your credit score. Newer cards with lower credit limits will have a smaller effect on your score if you close them.

How closing a card affects your score also depends on the other credit cards that you have.

If you only have two cards, closing one of them will have a big effect, even if it’s a newer card with a low credit limit. If you have 20 or 30 credit cards, even closing the oldest one probably won’t drop your score by a huge amount.

Does the Card Have an Annual Fee?

Some credit cards charge an annual fee. Typically, the cards that charge these fees are premium travel or rewards cards like the Chase Sapphire Reserve®, but some cards designed for people who are rebuilding credit also charge these fees.

If you’re not using an old credit card, it doesn’t make much sense to keep paying the fee just to keep the account open. In this case, closing the account to avoid the fee usually makes sense, because you can always use fee-free cards or other cards you still use to maintain good credit.

However, in many cases, there’s a way to avoid the annual fee and keep an older account open to maintain your credit score. Most major credit card issuers have many different credit cards, each with different fees, rewards, and perks. You can often reach out to your card issuer to request a product change to a related card without a fee.

For example, if you have a Chase Sapphire Reserve card, which carries a $550 annual fee, you can call Chase and ask the company to convert your account to a fee-free Chase Freedom Unlimited® credit card (read our Chase Freedom Unlimited review).

Your account will maintain its account age and credit limit and you’ll avoid the annual fee. You’ll lose out on the perks of having the premium card, but you’d lose those perks anyway by closing the account.

Do You Have Any Rewards Points or Cash Back Left on the Card?

One of the best reasons to use a credit card over a debit card or cash is rewards. Basic cash-back credit cards like the Citi® Double Cash can offer 1% to 2% of your purchases as cash back, and premium rewards cards like the Blue Cash Preferred® Card from American Express can offer as much as 6% back in bonus categories or bestow valuable travel points that you can redeem for flights or hotel stays.

Each credit card issuer and rewards program has different restrictions on redeeming your rewards. For example, you might have to reach a minimum balance before you can redeem your rewards or meet some other requirements.

Before you close a rewards credit card, check to see what rewards you’ve earned but haven’t redeemed. With most card issuers, closing your account means forfeiting any earned but unredeemed rewards.

Redeem as many of your rewards as you can before closing the card.

Will Keeping the Card Tempt You to Overspend?

Credit cards are powerful tools that make it easier to spend large amounts without carrying cash, protect your purchases, and help you earn rewards.

At the same time, they can be dangerous. If you use your credit card to buy things you can’t afford, you won’t be able to pay your bill in full when the statement period closes.

Credit cards let you carry a balance from one month to the next, but they can charge incredibly high interest rates. A simple purchase can turn into months or years of debt if you use your credit card and only make the minimum payment.

Some people close their credit cards to reduce the temptation to overspend. If you worry you’ll use the card to make purchases you can’t afford to pay off, closing it is a good idea.

The effect that closing an old account will have on your credit score is far less than the financial impact of carrying credit card debt. Plus, that debt will also reduce your credit score by inflating your credit utilization rate and making it harder to keep up with timely payments.

Do You Plan to Apply for Other Loans in the Near Future?

If you’re about to apply for a loan — especially a big one like a car loan or a mortgage — you should hold off on closing any cards or taking any other actions that could affect your credit. Even a small difference in your credit score can have a significant impact on these types of loans.

For example, your credit score is one of the factors that banks use to determine the interest rate they’ll charge on a mortgage or auto loans. An interest rate difference of just 0.25% can cost you more than $10,000 over the life of a 30-year, $250,000 mortgage.

In most cases, the potential savings of keeping your credit score as high as possible is more than worth paying one more annual fee to keep an old credit card open.

Final Word

Credit scores affect many aspects of your financial life, so keeping yours as high as possible is important. Having old credit cards is a good way to boost your score and to reduce the impact that opening new loans or credit cards will have on your credit.

In general, you should try to keep your old accounts open, even if you don’t use them regularly. Making a small purchase with each card once or twice a year is a good way to keep them active and avoid having the issuer close them for inactivity. It’s also a good way for you to keep an inventory of the accounts you have.

TJ is a Boston-based writer who focuses on credit cards, credit, and bank accounts. When he's not writing about all things personal finance, he enjoys cooking, esports, soccer, hockey, and games of the video and board varieties.