If you have an old credit card sitting in the back of your wallet that you haven’t swiped in years, you might be tempted to close your account.
Conventional wisdom would disagree, however. Unless the card comes with an annual fee, most credit score gurus will say leave it open. Often, they’re right.
But there are few one-size-fits-all answers when it comes to personal finance. If done correctly, closing an unused credit card can actually leave your credit score unaffected — or even raise it.
Why you should usually leave unused credit cards open
Your credit score is calculated based on five different factors. Two of those factors are directly affected by your unused credit cards, and those are:
- Length of credit history
- Credit utilization rate
Length of credit history is basically how long you’ve been using credit cards, and it makes up 15% of your FICO score. More specifically, it’s influenced by the age of your oldest account (the older the better), the age of your newest account (again, older is better), and the average age of all your accounts combined.
This is why it’s wise to leave unused credit cards open, particularly if you’ve had them for a while. According to Experian, “Closing an account with a long positive history may not always be the best action to take for your credit scores.”
Credit utilization rate is even more important. Your credit utilization ratio is the proportion of your available credit you’re currently using, and it’s responsible for 30% of your FICO score. It’s takes into account both your overall debt-to-credit ratio across all accounts and your individual credit card balances as compared to their limits. FICO recommends keeping these ratios below 30%, but the lower, the better.
Unused credit cards boost your credit score by lowering your credit utilization ratio. Let’s look at an example of a person’s hypothetical credit utilization ratio before and after closing a credit card with a $5,000 limit.
|Overall Credit Limit||Overall Debt||Credit Utilization Rate|
|Before Closing Credit Card||$20,000||$5,000||25%|
|After Closing Credit Card||$15,000||$5,000||33%|
As you can see, closing that unused credit card would bring your credit utilization rate above the 30% threshold and likely cause a decrease in your credit score.
When you should close unused credit cards
Your credit utilization ratio and length of credit history explain why it’s often best to keep unused credit cards open.
However, there are some circumstances under which closing an unused credit card might not hurt your score and may even help it.
If the credit card in question is a newer credit card or your newest credit card, then closing it is unlikely to have a negative impact on your length of credit history. If it has a low credit limit, or if you don’t have much debt, then it shouldn’t have much of an impact on your credit utilization ratio either.
Even if closing a credit card does increase your credit utilization ratio, this number is updated continually. So if you plan to pay off your debt in the next few months, you’ll see that rate go right back down.
How closing an unused credit card increased my credit score
If you have multiple credit cards with the same issuer, they may allow you to transfer your credit balance from a closed card over to your remaining card.
I used to hold four credit cards with a single card issuer, but I recently closed one of them because it had an annual fee. That credit card had an $8,000 credit limit. I asked whether my card company could transfer that credit limit to one of my other cards, and they were happy to do so. This meant that even though I had closed a credit card with an $8,000 credit limit, my available credit remained the same.
In fact, I actually saw a slight bump in my credit score for two reasons:
- My credit utilization rate on an individual credit card went down. The credit card that I transferred my credit limit to had a $2,000 balance. Therefore, when I increased its limit from $5,000 to $8,000, my credit utilization rate on that card went from 40% to 15%. Remember, your overall credit utilization rate is important, but so is your credit utilization on each individual account.
- My length of credit history went up. The average age of all accounts is a major factor in calculating the length of your credit history, and the credit card I closed was my newest one.
Let’s say you have three credit cards: one that’s 10 years old, one that’s five years old, and another that’s one year old. Your average age of all accounts is 5.33 years. However, if you close the credit card that’s only one year old, this figure increases to 7.5 years.
If done strategically, closing an unused credit card can help your credit score, rather than hurt it. That being said, if the card is one of your oldest, you should leave it open. The only reason to close an old account that’s in good standing is to avoid an annual fee.
First, try negotiating with your issuer to waive the annual fee, or see if they can downgrade the card. If you have to close an old credit card, you will probably see a drop in your credit score. However, as your accounts age and you continue to pay your bills on time, your credit score will continually rise.