Are you tempted to close that credit card in the back of your wallet that you haven’t swiped in years? If you’re not paying an annual fee on it, you might think twice before closing the account. There are few one-size-fits-all answers in the world of finance, and there’s always pros and cons with financial decisions. In the world of credit repair, we always have to consider all the variables involved before making a decision. Let’s take a look at when it benefits you to leave that unused credit card account open, and when you might want to close it.
Why You Should Leave Unused Credit Cards Open
Your credit score is calculated on five different factors. Two of them are directly affected by your unused credit cards:
Length of credit history
Credit utilization rate
Length of credit history, or how long you’ve been using credit cards, makes up 15% of your FICO score. It’s influenced by the age of your oldest account, the age of your newest account, and the average of all your accounts combined.
In this case, leaving an unused credit card open, particularly if you’ve had it for a while, is a good thing. According to the credit reporting agency Experian, “Closing an account with a long positive history may not always be the best action to take for your credit scores.”
Your credit utilization rate is even more important. Your credit utilization ratio is the proportion of your available credit you’re using. It’s responsible for 30% of your FICO score. It looks at your overall debt-to-credit ratio across all of your accounts. It’s recommended to keep these ratios below 30%, and the lower, the better. An unused credit card with a zero balance boosts your credit score by lowering your credit utilization ratio.
When You Can Close Unused Credit Cards
There are some circumstances which closing an unused credit card might not hurt your score, and may even help it. If the card you’re considering closing is a newer credit card or your newest, then closing it is unlikely to have a negative impact on your length of credit history. If it has a low credit limit, it will not have much of an effect on your credit utilization ratio either.
In most cases keeping your unused credit cards open is a positive thing for your credit score. It shows you’re responsible and can manage large amounts of credit without getting behind. With that said, life is unpredictable, and sometimes you get behind and need to utilize your available credit. If you’re in a situation where you’re behind or need some assistance getting your credit back in shape, we can help. We specialized in credit repair and strategies to help people minimize debt, interest payments, and everything credit related.