You have a wallet full of credit cards, several of which you never use. Should you go on a credit diet and close at least some of your unused credit card accounts? Although it may go against your frugal instincts, it's often wise to keep your unused credit cards rather than canceling them.
Credit Cards and Your Credit
While credit cards do not make up your entire credit profile, it's likely they represent a major proportion of your credit history. Your credit report includes summaries of all your financial transactions, including how long you've had a particular account, your payment record and how much, if anything, you still owe. Credit cards also figure into the calculation of your FICO score, which is a numerical representation of your payment history, the total length of your credit history, the types of credit you have, any new accounts you've opened and the amounts you owe on each account.
Don't Close These Accounts
If you've had a a credit card account since your freshman year of college and you've managed never to miss a payment or exceed your credit limit, that's an account you should never close. Likewise, if you have credit cards with high credit limits, but have maintained low balances, you should retain those credit cards as well. A long history of good credit, plus a low credit-utilization ratio both boost your credit rating and your FICO score. You should also keep credit cards with low interest rates.
Accounts It's OK to Close
If you're carrying a credit card with a 29 percent interest rate and you have decent credit, try shopping for a credit card with a lower interest rate. Likewise, closing a credit card account with a low credit limit may be a wise move. However, if you don't use an account because you've maxed it out, or because the credit card company has suspended your account for nonpayment, simply closing the account won't solve your problems. The account will remain on your credit report and drag down your FICO score until you pay off the balance or otherwise settle the account with the credit card company.
Minimizing the Credit Hit
Closing credit card accounts can take a toll on your credit profile. However, you can minimize the potential damage by closing accounts. Pay down the balances on the cards you intend to keep to maintain as low a credit-utilization ratio as possible. If you intend to close several accounts, space out your account closures rather than closing several accounts at once. Don't close any credit card accounts immediately before you apply for any type of credit, including a mortgage. If you're worried about inactivity fees or lowered credit limits on dormant accounts, make small purchases periodically and pay off the balances right away.
- Kiplinger: Closing Credit Card Accounts
- Kiplinger: Close a Credit-Card Account to Avoid Fees?
- Bankrate.com: Should You Cancel an Unused Credit Card?
- Bankrate.com: Top 5 Tips for a Tiptop Credit Score
- MyFico: Credit Cards and Credit Scores; Here's the Relationship
- MyFico: What's In Your FICO Score
- MyFico: What's Not In Your FICO Score
- The Motley Fool: Don't Cancel That Credit Card!
Chris Blank is an independent writer and research consultant with more than 20 years' experience. Blank specializes in social policy analysis, current events, popular culture and travel. His work has appeared both online and in print publications. He holds a Master of Arts in sociology and a Juris Doctor.