Unused credit cards may not draw much attention from the average consumer. After all, who worries about a long-forgotten credit card sitting in a desk drawer, surrounded by old driver’s licenses and discarded business cards?
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There is, however, a big interest in unused credit cards by credit scoring agencies. In the period between the second quarter of 2015 and the second quarter of 2019, total credit card limits stood at an eye-popping $3.95 trillion -- and, despite usage trending up, most of that was $3.12 trillion in unused credit, according to Experian.
What happens if you cancel an unused credit card?
There are myriad questions to ask why so much credit card largesse goes unused.
But one question cardholders should definitely be asking is how an unused credit card impacts credit score health – especially if they cancel the credit card outright.
“Yes, canceling a credit score can certainly hurt your credit score,” said Matt Woodley, founder of Credit Informative, an online credit counseling platform. “The credit bureaus use your credit utilization ratio (i.e., your credit card balance compared against your credit card limit.) If you close a credit card account with a high limit that can certainly hurt your credit score.”
According to Woodley, 15 percent of an individual’s FICO credit score is based upon the length of credit history and is influenced by the age of the cardholder’s oldest account. Another 30 percent is based on the credit utilization rate. Add it all up and the end result of a closed credit score could result in a solid ding to one’s credit score.
“Why would you want to close an account with a long history which is helping to improve your credit rating?” Woodley noted. “Plus, an unused credit score lowers your credit utilization ratio which further helps your credit score. That’s not exactly a win-win.”
The actual credit score loss stemming from an unused credit card varies on a case-by-case basis. That said, the hit on a consumer’s credit score can be significant.
“Depending on the amount of available credit on the card, you might see a drop in your score ranging anywhere from a few points to over 20 points,” said Forrest McCall, a credit specialist and owner of Don’t Work Another Day, a personal finance, investing, and entrepreneurship blog.
Should you cancel unused credit cards or keep them?
By and large, it's a much better idea to keep an unused credit card, credit experts say.
“Keeping the card will help you keep your average age of accounts high,” said Sa El, co-founder of Simply Insurance, a financial services firm in Atlanta. “Over time, you could qualify for a credit limit increase and help increase your credit utilization, which can help increase your credit score.”
Other personal financial experts agree.
“We recommend keeping credit cards even if they are not being used,” McCall said. “This will keep the number of open accounts and amount of available credit up for a cardholder, and should result in a boost to that cardholder’s credit score.”
How to cancel a credit card without hurting your credit score
Consumers shouldn’t close a credit card until the card usage rate is at zero and the card debt is fully paid down, card experts recommend.
“The best way and time to cancel a credit card without hurting your score is to only cancel it when you have zero percent utilization on your credit profile,” El said. “Otherwise, you’re sure to see some type of credit score decrease when you cancel the card.”
El also strongly advised against closing a credit card if you have a balance. “Pay the balance off first and then close the account,” he said. “It will make things much cleaner for a credit score, with no debt leftover.”
There are other cases in which closing an unused credit card makes sense.
“On the upside, closing a card with an annual fee is a good financial move,” said Brian Dechesare, founder of Mergers & Inquisitions, a financial advisory blog. “In that case, it's wise to request an annual fee card be converted to a card with no fee.”
“The negatives are the impact on the credit utilization ratio and not having the card for emergencies,” he said.
Key takeaway to maintaining your credit score
Closing a credit card is a uniquely personal decision and each cardholder can do so for multiple reasons.
If a cardholder takes the “close it out” route, just know there could be negative credit score ramifications. There are ways, though, to keep a card open and risk no credit score headaches.
“A better practice to keep these accounts open, with a small balance on them, even as little as a dollar,” said Charlie Scanlon, president of Phoenix Credit Consultants, in St. Louis, Mo. “Having a small balance will discourage a card issuer from closing the account for inactivity, and keep your credit intact.”