Many people have unused credit cards sitting in their desk drawer that they don’t use anymore, and they probably wonder about canceling them but never do. We are going to give you some good reason why you should cancel them, and some reasons why you might want to leave them open.
Some good reasons to cancel credit cards are: to to be more organized and consolidate accounts that you have open, avoid being tempted to use these cards in the future, or cancel them so that no one can find them and use them fraudulently. If you are working on increasing your credit score, or will be filling out an application for something that involves checking your credit score, you may want to leave them open. But, before you make any decision, there are a couple things you need to go over first.
What to Do With Unused Credit Card Accounts
Next comes the decision about canceling credit cards, or to just leave them open and dormant. The main factor that comes into this decision is the effect that canceling these accounts will have on your credit score. Determining this can be confusing and it is hard to figure out the exact impact it will have on your score, but we will try and make it easy. 15% of your credit score is based on the length of your credit history. This is composed of when you opened your first line of credit (your first credit card, a mortgage, car payment etc.) and also the average of all of your credit lines combined. So if you do not want to have a big impact on your credit score, you will want to leave your oldest unused credit cards open. A good solution is just to cut the credit card up therefore you wont be tempted to use it and you will still get credit for the length of your credit history with that card. If you want to go ahead and cancel some of the newer unused credit cards then your credit score will take a move downward at first. But, if you are responsible and always pay off your current debts punctually, then over time you will see your credit score increase back to what it was (or better). Remember, the only time that your credit score will have an effect on you is when you are taking out a new line of credit. So if you know that you are not going to be getting a new credit card or taking out a loan in the near future, then that is a good time to go ahead and cancel the credit cards you want.
Your Credit Utilization Factor
The next factor is what you need to consider most before closing out your unused credit cards. 30% of your credit score is based on “amounts owed” and part of this component is your credit utilization ratio. This is the total amount of your entire current credit card balances put together, compared to your total credit limit. So if you have 2 credit cards with a $5,000 limit on both of them you have a total credit limit of $10,000. Therefore if, with these 2 cards combined, you have a total balance owed of $3,000, your credit utilization ratio would be 30%. Remember, your unused credit cards are counting towards your total credit limit, so if you decide to cancel one (or more) of them, your credit utilization ratio will go down depending on how much money you owe on your current credit cards. The best place for your credit utilization ratio to be is around 30% or less. So if you can cancel some of your unused credit cards and still stay around this range, then you will be ok and it wont have that adverse of an effect on your credit score. If you cancel 3 or 4 of you unused credit cards and it causes your credit utilization ratio to jump to 80% then you should leave these accounts open and work on paying off your current credit card balances, or ask your current credit card issuer for an increase in your credit limit.