Have you recently stopped using a credit card? If so, consider whether to close the account altogether. Closing a credit card may seem simple, but weighing the benefits and drawbacks before choosing is essential. Let’s explore some key factors when deciding whether to keep or close a credit card you’re not actively using. Discover expert credit card management tips to optimize rewards, minimize fees, and maintain a healthy credit score.
Why You Might Want to Keep the Credit Card Open
While you may not be using your credit card, there are several reasons why it could still be worth keeping the account open:
Helps Maintain a Lower Credit Utilization Ratio
One of the most significant benefits of keeping a credit card open is its impact on your credit utilization ratio. This ratio is the amount of credit you use compared to your total available credit. A lower utilization ratio can positively affect your credit score. Keeping the card open, even if you’re not using it, maintains your total available credit, which helps keep the ratio low.
Preserves Your Credit History
Closing an older credit card can shorten the average age of your accounts. A shorter credit history can lower your credit score, indicating a shorter period of responsible credit use. Keeping your older card open can help maintain a longer average account age, which benefits your credit score in the long run.
No Cost if No Annual Fee
If your credit card doesn’t charge an annual fee, keep it open. There’s virtually no cost involved in maintaining the account, so you can keep it active without worrying about extra fees. It’s essentially free credit that can be useful down the line.
Access to Perks and Benefits
Some credit cards come with valuable perks such as extended warranties, purchase protections, or discounts on specific services. Even if you aren’t using the card regularly, these benefits can still be helpful. Keeping the card open is a good idea if you value these perks and may want to access them later.
Backup for Emergencies
Your unused credit card can be a backup option for unexpected expenses. If an emergency purchase is needed, having an additional card with available credit can help avoid financial stress.
When Closing the Credit Card Makes Sense
Keeping the card open has several benefits, but there are scenarios where closing the card is the better choice. Here are some situations when it could be a good idea to close a credit card:
High Annual Fees
If your card has a high annual fee but needs to utilize its benefits, it may not be worth keeping. Paying a yearly fee for a card you rarely use can be unnecessary. In this case, closing the card could save you money in the long term.
Overspending or Temptation
For some individuals, having access to a credit card makes it harder to control spending. If you’re prone to overspending or accumulating debt, closing an unused card can be a good move to avoid temptation. Reducing your number of cards can help streamline your finances and encourage better spending habits.
Streamlining Finances
If you have multiple credit cards and managing them is overwhelming, closing one might simplify your financial situation. Fewer cards mean less to keep track of, making managing payments, due dates, and balances easier.
Essential Steps to Take Before Closing the Credit Card
If you’ve decided that closing the card is the right decision for you, there are a few things you should do before finalizing the closure:
Redeem Rewards and Benefits
Before closing your credit card, redeem rewards points, cash back, or miles earned. You may lose these valuable benefits if you do not redeem the card.
Check Your Credit Utilization
If your card has a high credit limit, closing it could affect your credit utilization ratio. If you carry balances on other cards, closing a card with a high limit could increase your overall utilization ratio, harming your credit score. Ensure that your credit utilization remains healthy before closing the card.
Consider Downgrading Instead of Closing
Some credit card issuers allow you to downgrade your card to a no-annual-fee version. This way, you can keep the credit line open without incurring fees. If your credit card issuer offers this option, it may be wise to downgrade rather than entirely close the account.
Final Thoughts: Does the Card Fit Your Financial Goals?
Ultimately, deciding to close or keep your credit card depends on how it fits into your broader financial strategy. For example, if you travel frequently, a card with travel perks, even if rarely used, could still provide value. On the other hand, if the card incurs unnecessary costs or tempts you to overspend, closing it might be the better choice. Improve your financial health with these essential credit card management tips. Get the most out of your card and avoid common mistakes.
Discover top credit card management tips to boost your rewards, manage debt, and enhance your credit score. Before making any decisions, take a step back and evaluate how the card impacts your credit score, finances, and long-term goals. This will ensure you make an informed and beneficial decision aligning with your financial objectives.