3 Signs It’s Time to Close Unused Credit Cards and What to Do Next

You have unused credit cards taking up valuable space in your wallet. Closing that card may seem like an easy decision, but it’s actually not always a simple decision. Canceling that card can have unintended consequences on your finances, so it’s best to only do so under specific circumstances. Here are three times when it’s actually worth closing a credit card, and one thing you should do after you close it to minimize the impact on your credit score.

What’s wrong with closing a credit card?

When you close a credit card, you lose access to that credit limit. If you don’t use it, it might not be a big deal. But it’s important to the three credit bureaus: Equifax, Experian, and TransUnion. When you lose access to credit, your credit utilization ratio (the ratio of the amount of credit you use each month to the amount you have access to) increases.

For example, if your limit is $10,000 and your balance is $2,000, your credit utilization ratio is 20%. If you want to keep your credit score high, it’s important to keep it below 30%. That’s why many people prefer to keep their old credit cards open, even if they’re just collecting dust.

When should I close my credit card?

Here are three times when closing a credit card can hurt your credit score.

1. An annual fee is charged to the card.

Cards that offer valuable rewards, like some travel credit cards, often have an annual fee. Sometimes this can cost the cardholder hundreds of dollars per year. If you use the card enough to get the annual fee back in rewards, it’s not a big deal. But having a card is a waste of money if you don’t use it.

2. You are tempted to overspend.

Some people are tempted to spend their available credit even though it may not be the best move financially. Charging more on your credit cards than you can pay off each month can result in costly interest charges and a debt cycle that is often difficult to break out of. For those who worry about falling into this pattern, it may be better to eliminate the temptation of unused cards altogether.

3. I don’t want to be monitored continuously.

Even if you don’t use a credit card, it’s a good idea to check your account regularly to make sure no one has accessed it. Maybe you set up a family member as an authenticated user a while ago and then forgot about it. Or maybe an identity thief has taken control of your card and is making fraudulent purchases in your name. Verifying your account before you receive a bill may be the only way to identify this issue. However, if you don’t want to do this on a regular basis, closing the card may be a better option.

What to do after closing a credit card

To close your card, simply contact your card issuer and let them know that you wish to close your account. However, you are not liable for any amounts still owed to the issuer.

Then wait a month or two to see if the card issuer has time to report that the account has been closed to the credit bureaus. After that, you’ll want to check your credit report and score. This will help you see how closing a card has affected your credit.

You can view your credit report for free at AnnualCreditReport.com. This will show you all open credit accounts in your name, their balances, and payment history. But it doesn’t tell you your credit score, which lenders use when deciding whether to lend you money.

There are many companies that offer free credit scores, but you want a company that offers your FICO® score, which is what lenders most often use. With FICO, the creator of FICO® Scores, you now have free access to the Equifax FICO® Score. Experian also offers a free FICO® Score service.

Scores range from 300 to 850, with higher scores being better. Ideally, you want a score of 670 or higher. If your score is lower than this, you can take steps to improve your score. But it usually takes time.

Closing a credit card will increase your credit utilization ratio, but there are ways to lower it again. First, you can charge less on all your credit cards each month. Or maybe you pay your bills twice a month. Credit card issuers only report your balance to the credit bureaus once a month, so paying twice makes it look like you spent about half what you actually did.

You can also request a credit limit increase on another card. However, it is best to only do this if you are reasonably certain that you will be approved. You’ll have the best chance if you’re a reliable borrower and haven’t applied for new credit within the last six months or so. Applying for too much new credit raises a red flag with lenders because it looks like you need to borrow money in a hurry.

Check your credit score again in a month or two after making the change to see the effect. And continue to take positive steps whenever possible to keep your credit score high.

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