Even if you have a credit card you don’t use anymore, you might want to think twice about closing it. Yes, that may seem counterintuitive, but despite the bad rap credit cards get, there are reasons for keeping them open—as long as you don’t find yourself overspending on them.
Five components make up your FICO credit score: the amount you owe, payment history, credit card age, new credit, and credit mix. If you’ve been a responsible credit card owner and have made your payments on time, then you’ll score well in the payment history component, which makes up 35% of your overall credit score. But that doesn’t mean closing your card can’t hurt you.
The second highest consideration to think about when it comes to your credit score is your credit utilization. The amount you owe on your cards compared to how much available credit you have is weighted at 30% of your credit score. It’s recommended you don’t use more than 30% of your available credit. By closing a card, you run the risk of shrinking your available credit and taking a credit score hit. Ideally, the more credit you have available that isn’t being used is going to benefit you.
Another thing to think about is the age of your card. Maybe it’s your very first credit card but you no longer use it. That doesn’t mean you should close it. By closing it, you could be shortening your credit history, which is factored into your overall credit score.
Similarly, you may not want to close your card if you’re going to ruin your credit mix. Having just one type of credit can hurt your score while having a good mix of various credit types - paid on time - can ensure your credit score remains healthy.
Of course, if you find yourself overspending, closing it might be the best route. But if you want the benefits of keeping your card open without the risk of falling into debt, you can try cutting it up. This way, you’re keeping it open and reaping the benefits of the credit it has helped you establish.
While there certainly are reasons to close a card, including having a high interest rate and overspending, sometimes it might make more sense just to transfer the balance to a card with a lower interest rate.
Either way, if you’re thinking about closing a credit card because you don’t use it, you’ll have to make sure the balance is paid off or transferred before doing so. And if you’re struggling with debt, you can make an appointment with a credit counselor. A counselor will help create a budget that works for you and may recommend enrolling in a debt management program.
If you qualify, you might be advised to close your cards. While this might make your credit score take a small dive, by paying your debt off over time, you’ll reap the benefits of responsible repayment. Within three to five years as your cards are paid off, your score will start to recover and get better, making for a healthier credit score and healthier spending habits overall.
Looking for more advice on how to handle your credit card and overall financial management? We offer credit counseling to equip you with the skills you need to restore your finances.