What are you doing with your unused credit cards? Are you keeping them? Have you closed them? Should you close them? Surprisingly, the answer isn’t a straightforward yes or no; it all depends on your individual situation.
For example, you may have one or more credit cards that you’re no longer using. This is typically the case when you sign up for a department store or a major retail chain. You sign up for the percentage off of your total purchase and then, after paying the amount due, never use the card ever again. Should you close it?
Closing old and unused credit cards without balances (meaning, you don’t owe any money on those cards) increases your credit utilization ratio. Credit utilization is the ratio of your credit card balances to credit limits as listed on your credit report; the higher the ratio is, the more it can negatively affect your FICO credit score.
Here’s an example: if your balance is $300 and your credit limit is $1,000, then your credit utilization is 30 percent. To find out your credit utilization simply divide your credit card balance by your credit limit then multiply by 100. The lower your credit utilization, the better. That shows you’re only using a small amount of the credit that’s been loaned to you.
So, if you close an old or unused card, you’re basically getting rid of some your available credit, which increases your credit utilization ratio. Another factor that impacts your credit utilization ratio is the size of the credit limits on your old and unused cards. The more unused credit you have available, the higher your score can be.
Keeping old or unused accounts open can help your credit scores. With that in mind, if one of your unused cards has a high annual fee and you know you won’t be making any large, credit-dependent purchases in the near future, you might want to close out that card. Always remember that doing so may affect your credit utilization rate, which in turn could hurt your score. Also, closed accounts are eliminated from your credit report after they have been closed for ten (10) years. At that time, the account closure could negatively impact your score if your other accounts are much newer.
This leads to another component of your credit score, the length of your credit history. In general, longer credit histories are better. Closing old credit cards, especially your oldest card, makes your credit history seem shorter than it really is. People with the highest credit scores, or scores above 760 — on a scale of 300 to 850 — are typically using less than ten percent of their available credit at any given time.
If you have old or unused credit cards, and you keep those cards open, make sure that those cards are safe-guarded and that information is protected. You don’t want to have your credit limit and your credit history compromised. AmOne is your trusted source for all things money. For your active and your inactive cards, we can help you connect with credit monitoring services, help you obtain your credit report, for free, and answer questions about your credit scores. Find out how to reach us and learn how AmOne can help you today.