Managing multiple credit cards can be tricky, especially when you have cards you rarely use. While cancelling them might seem like a smart move, it can have unexpected effects on your credit score and financial health. Before making a decision, here are seven key factors to consider:
1. Credit score impact
Closing an old credit card account can shorten your average credit history, potentially lowering your score. The longer your credit history, the better your score. If the card is one of your oldest, keeping it open can help maintain a strong credit profile.
2. Credit utilization ratio
Your credit utilisation ratio is the percentage of your available credit that you are using. A lower utilization ratio can boost your credit score, making you more attractive to lenders when applying for loans. Closing a credit card reduces your total available credit, which can increase your utilisation ratio and potentially lower your credit score.
3. Financial safety net
An unused credit card can serve as a backup during emergencies, providing access to funds without dipping into your savings. If you foresee needing extra credit in urgent situations, keeping the card active might be beneficial.
4. Annual fees and hidden costs
Some credit cards charge high annual fees even if you don’t use them. If the benefits don’t outweigh the costs, consider cancelling the card. However, before doing so, check if the issuer can waive the fee or offer better terms.
5. Temptation to overspend
For those who struggle with impulse purchases, keeping an unused credit card can lead to unnecessary spending. If you’re prone to accumulating high-interest debt, closing the account might be the better option.
6. Lender perception
Having multiple open credit lines can sometimes raise red flags for lenders when applying for a new loan. Too much available credit may make lenders hesitant, thinking you have the potential to accumulate significant debt.
7. Fraud prevention
Even unused credit cards are at risk of fraud. If you choose to keep your card open, monitor it regularly and store it securely to prevent unauthorized transactions.
Deciding whether to keep or cancel an unused credit card depends on fees, financial goals, and spending habits. If the card offers long-term benefits without unnecessary costs, keeping it active may be a smart move. However, if it adds to financial strain or spending temptations, cancellation might be the better choice.