We are people looking forward to securing our future financially and for that, we take a lot of measures. Credit is one of those tools which help us secure some funds for our day-to-day needs and especially in emergencies. Although the money from a credit card is not our own and needs to be repaid it is always better than nothing. Amid all these thoughts, people secure credit cards for themselves. For some, the cards are used regularly, some use the card now and then whereas there are also cases when you do not use the credit card at all or you might have too many cards that you forgot about one.
When you are aware that you are not using your credit card and you find the card does not need it at all, you might think of closing the card. This though might cross your mind at least once and it seems quite practical as well. But closing your credit card might not even work in your favor as it can impact your credit score. Not just this but there are many other reasons as to why closing a credit card account might not work in your favour.
How Closing a Credit Card Can Impact Your Credit Score?
Credit Score is composed of your credit history, credit mix, borrowing and repaying behavior, and credit mix. Credit history also includes new credit and outstanding amounts, and the length of credit history also holds a significant value. Among all of these components, the unused credit card directly influences the credit history and credit utilization the most.
Credit bureaus consider your credit history as a whole where from your oldest to newest credit card and loan accounts are checked. Not just that but the average age of all your other loan accounts and cards are combined. Lenders prefer a long credit history over a short one, the reason being trust. The longer your credit history will be, the clearer your behavior towards the credit will be shown. This not only makes the user’s financial personality clear but also works as a trust factor. A better financial history indicates a responsible nature which helps the lender determine your creditworthiness.
Now when you are closing an older unused credit card, you are decreasing the length of your credit history or age. Since credit history holds a significant amount of weightage in determining your credit score, closing the account directly influences the credit score.
Credit Utilization means the credit utilized which is calculated in the form of ratio. The ratio of your current debt to your total available credit. This ratio includes all the data from your loan account and your credit utilization from your credit cards. Usually, it is advised to keep the Credit Utilization Ration as low as possible. The credit utilization is supposed to be from 30% to 50% at max. The unused credit cards remaining credit can help you keep your credit utilization as low as possible.
So, when you close your old credit cards, your credit utilization also rises us making it directly impact your credit score.
Closing an old credit card is not a considerable measure at all. For example, you have a credit card for 4 years and it has remained unused for half of the time. But it has also made your credit history much longer and you will still have some emergency funds at the side.
But if we say that you have received a new credit card, say for a few months and you are already not using it at all and wish to close it. This closing will not have any significant impact on your credit utilization.
Having a credit card, be it used or unused, works as a safety net for you. Even if you do not use a credit card on a day-to-day basis, you will still have some emergency funds to rely on. To add more to the list, you will always be able to use the perks and benefits affiliated with that credit card.
When to close an unused credit card?
Even though you are advised to close your unused credit cards, there can be cases where you might find closing a credit card a better option. Here are the following situations where closing unused credit cards makes sense –
- No perks affiliated with the credit card. This being the case then the significance of the credit card is as good as lost. If there are no benefits of having a credit card then closing it might be better.
- Closing an unused credit card which optimizes a significant amount of your credit limit will be beneficial. For example – if your credit limit is 13 lakhs and you have three credit cards each of 4 lakh credit limit. Out of these 3 credit cards, you are not using 1 credit card that has a 4 lakh spare amount, so moving forward the next credit card you will apply for might not give you a justified amount of credit limit. This is because the unused credit card is already exhausting your financial limit of credit.
- Paying a high annual fee for an unused credit card makes no sense. When you are aware that you are not going to use a credit card with a high renewal fee, it is better to opt for closing at that time.
- Having too many credit cards and keeping on paying their annual fee is tiring and can also be expensive if you have some high-charging cards involved. In these cases, unused credit cards are better removed.
There can be cases where closing credit cards can help you get rid of many financial expenses, especially when the annual fee for the unused credit card is higher. However, it is not always recommended to discontinue a credit account just because you don’t use it.
Finance tools like credit cards provide you with a great deal of benefits. Credit cards can be used in many ways and help you avail of many offers and discounts. However, having more credit cards might leave some of your cards unused. Although you can close unused credit card accounts in some cases it does not do any good to your credit history and credit score. Having extra credit cards always keeps your credit utilization in check and you always have some emergency funds in hand.
But when your unused credit cards are overweighing their worth, it is okay to close the line. There are always exceptions and scenarios where the most sensible option might not work in your favor. it always works in your favor if you have some extra information.