Should I Close Unused Credit Cards?

By Matthew Frankel Markets Fool.com

Many people have an old credit card they don't use -- maybe a starter card designed to build credit, or a card that had an excellent sign-up bonus that you used for a few months. Closing credit cards can be a good idea in some cases, but it can also have a negative impact on your FICO score.

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With that in mind, here's a quick guide on how canceling credit cards can affect you, so you can decide what to do with your old credit cards.

Image source: Getty Images.

There are some good reasons to close unused credit cards

There are a variety of valid reasons people want to close their unused credit card accounts.

For starters, if an unused credit card has an annual fee, it can seem like a silly ongoing expense to continue to pay, especially if you're not getting any use out of the card's benefits. As a personal example to the contrary, my wife has a Delta SkyMiles Platinum American Express card that has a $195 annual fee, but as a perk of membership, she gets a free companion airfare certificate once a year, and gets free checked bags on Delta flights. So, even though she doesn't use the card much, it's still worth keeping.

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Another reason is to get rid of a low-limit "starter" credit card you no longer need. If you still have an old credit card with a $300 limit, it may seem silly to hang onto it when you have credit lines in the thousands on your other cards.

There could be several other good reasons you're thinking about closing an unused credit card, but it's important to consider the possible negative implications before you do.

Consider the negative effects

To understand why closing unused credit cards can be a bad idea, there are a few parts of the FICO credit scoring model that are important to know.

First, 15% of your FICO score comes from the length of your credit history. This category includes several time-related factors, but the average age of all of your open accounts, as well as the ages of your individual accounts are among them. If your unused credit card represents one of your oldest open credit accounts, closing it could lower your all-accounts average age, as well as take a mature credit account out of the equation.

My oldest open credit card is a Capital One Platinum that was my "starter" card. It has a $500 credit limit and a $59 annual fee, and I haven't used the card regularly in about five years. However, it is my oldest open credit line by a wide margin, so I continue to keep it open (for now).

Additionally, 30% of your FICO score comes from "amounts owed." You may be thinking, "If I don't use the card, it can't have an effect on this category." However, you'd be wrong. Among other factors, this category considers the total amount you owe on your credit accounts relative to your available credit. By closing an unused card, you're reducing your available credit, and increasing your credit utilization percentage.

It's worth mentioning that in the majority of cases, closing an unused credit card will only result in a small drop in your score, but every situation is different. For example, if you only have two open credit cards, and you close one that represents half of your available credit, it could have a more significant impact on your score than if you have a dozen cards and simply close a starter card.

So, should you close your unused credit cards?

Every situation is different, so there's no one-size-fits-all answer to this question. My general feeling is that if your credit card has no annual fee, there's not much to gain by closing the account. Furthermore, if a card represents your oldest (or one of your oldest) accounts, it could be a good idea to keep it open as long as the annual fee isn't excessive.

On the other hand, if these two things don't apply, you need to decide whether the cost of keeping the card open is justified by the possible negative impact on your credit score. If the card doesn't seem worth keeping, it can be a smart move to close it.

Cards you'll never have to close

The bottom line is that if your unused credit cards have no annual fee, there's really no beneficial reason to close them. If you are in need of a credit card, and don't want to worry about the negative effects of potentially having to close the account later on, check out our list of the best no-annual-fee credit cards, as well as our picks for the best balance transfer cards, in case your high-annual-fee credit card you'd like to close still has a balance on it.

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Matthew Frankel owns shares of AXP. The Motley Fool recommends AXP. The Motley Fool has a disclosure policy.