Should You Cancel Unused Credit Cards? Financial Experts vs. Reddit
What to do with an unwanted credit card?
A thread in Reddit's r/personalfinance subreddit recently reignited a debate that's been circling personal finance forums for years: Should you cancel unused credit cards or keep them open?
Predictably, the post drew hundreds of mixed responses.
But what do the pros recommend? MoneyLion spoke to credit card experts and here’s what they said you should do with a credit card that's left rotation.
On Point: 3 Ways Credit Card Rewards Will Let You Travel Free or Cheap
Don’t Delay: Start Growing Your Net Worth With Smarter Tracking
Canceling a Credit Card Quietly Hurts Your Credit Utilization
Positive payment history stays on your credit report for up to 10 years even when you cancel your unused credit cards. However, you’ll be reducing your credit utilization ratio, which may negatively impact your credit score.
"Let's say you have a total credit limit of $10,000 and a balance of $3,000; that's a 30% utilization rate. Close a card with a $4,000 limit and your utilization spikes to 50% overnight,” said Ali Zane, CEO and credit consultant at Imax Credit Repair Firm. “That kind of jump can cost you 30 to 50 points, even though you haven't spent a single cent more."
Credit utilization often accounts for 30% of your FICO score. So, an increase isn’t good for your credit profile. Experts recommend keeping your credit utilization ratio below 30% at all times. The lower, the better.
Keep Financial Literacy Month going — learn how the MoneyLion app helps you track, manage and move your money in one place.
Your Oldest Cards Are Very Important
The length of your credit history accounts for 15% of your FICO score. Closing your oldest credit card will reduce the average age of all your accounts and lower your credit score, regardless of whether you haven’t used the cards for years.
“My clients sometimes close cards they opened back in their college years, figuring these accounts are meaningless, only to watch their score drop by 25 points six months later,” said Zane.
The One Reason To Actually Close a Card
If the card has an annual fee that’s hard to justify, closing it may be worth the trade-off. But before you cancel it, consider downgrading to a no-fee version first if the card offers some benefits.
“If you have a card with no annual fee, then there really aren't a lot of downsides to continuing to carry it open, even if you aren't actively using it. It can still add value to your credit profile without adding cost to your wallet,” said John Garner, founder of Odynn.
But if you want to do away with unneeded accounts, Garner says canceling them may be a viable option as long as you’re intentional. “Try not to make changes prior to applying for something significant such as a home loan.”
Your Overall Credit Profile Matters
Not everyone will feel the impact of canceling a credit card. That’s why blanket advice like “never close a credit card” doesn’t apply to everyone. “There’s a reason why someone with a score of 780, several open accounts and a long credit history can survive the loss of a credit card much easier than a person with 650, three accounts and a five-year credit history,” Zane said.
If your finances are stable, the card has no fee and you’re not tempted to overspend, keeping it open may make sense. Setting one small recurring charge on the card, like a streaming subscription and paying it off automatically can help keep the account active. But if the card has high fees or makes managing your finances harder, closing it may be the smartest move.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: