If you have credit cards that you don’t use, you probably assume you are doing a good thing if you cancel them. After all, then you have less of a chance of getting yourself into debt again, right?
While logically it sounds good to cancel a credit card, there are certain circumstances that can make it a bad decision. Keep reading to learn if you should close your credit card or leave it open.
What is Your Utilization Rate?
One of the largest factors that affect your credit score when dealing with a credit card is the amount of outstanding debt you have. Your credit utilization rate, which is a comparison of your outstanding credit to your total credit limit plays a big role in your credit score. If your utilization rate is too high, it could damage your credit score.
That’s why you need to know where you stand with your utilization rate. It’s not as complicated as it sounds. First, figure out how much outstanding credit card debt you carry right now. Then figure out the total of your credit lines. You can then figure out the percentage of debt that you carry compared to your credit lines. If the percentage is higher than 30%, you run the risk of damaging your credit score even further if you close a credit card. This is because you’d lower your available credit, which in turn, would increase your utilization rate.
It’s like a domino effect. If you have a lot of outstanding credit card debt, your best bet is to keep the unused credit card open and just don’t use it. This way you keep your utilization rate lower.
What is Your Credit Age?
Another term you need to familiarize yourself with is your credit age. This is the average age of your accounts. The older your credit age is, the better effect it has on your credit score. Basically, lenders like to see that you have a longstanding (and good) relationship with the debts that you carry.
If you cancel a credit card, you could potentially lower your credit age, which could work against you. Before you close that card, figure out how it falls within the range of your credit card ages. Is it the newest card? If so, then canceling it won’t have much of a negative effect. On the other hand, if it’s your oldest card, it could have a detrimental effect on your credit age. Just like that domino effect again, a lower credit age can cause a lower credit score.
What is the Risk of Overusing the Card?
Now that we talked about the reasons to keep the card open, let’s touch base on a big reason you may want to close the credit card – your spending.
Are you the type of person that racks up credit card debt as soon as there is room in your credit line? If so, having an unused credit line probably isn’t a good thing for you. If you rack up your credit card debt again, you ruin your utilization rate, which can damage your credit score. If you also put yourself at risk of paying your bill late, that could damage your credit score even further.
If the temptation of an unused credit card is too much for you to handle, you are better off canceling it even if it will increase your utilization rate or lower your credit age. The effects are much less damaging than maxing out a credit card can do to your credit score.
So should you close your credit card? It takes a little self-evaluation. Look at the financial side of it first. Do you need the credit line or credit age to keep your credit score up? Next, decide where you stand as far as using the credit line. Can you stand an open and unused credit card or will the temptation be too much? The answers to these questions should help you make the right choice.