The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
While experts recommend that you keep even unused credit cards open instead of canceling, there are instances when it may make more sense for you and your financial well-being to cancel a credit card.
Credit card debt remains a problem for many Americans. In 2020, the average household credit card balance was $8,089. For some, the temptation to use credit cards for an impulse purchase can snowball into a high balance that’s increasingly difficult to pay down.
This may lead you to wonder, “Should I close my credit card?” While experts recommend that you keep even unused credit cards open instead of canceling, there are instances when it may make more sense for you and your financial well-being to cancel a credit card.
We lay out the pros and cons of keeping and closing your credit card so that you can make an informed decision for yourself and your credit score.
Is it better to cancel unused cards or keep them?
The general rule of thumb is that it’s best to keep your unused cards rather than cancel them. Open credit cards, even ones you aren’t using, help you build up your credit history and increase your available credit, thus lowering your credit utilization rate. This is important because these relate to two factors that credit bureaus use when determining your credit score.
On the flip side, sometimes the knowledge that you have a credit card available for purchases is too big of a temptation. If you’re having trouble controlling your credit card spending or if your credit card has a high annual fee, you may be better off canceling your card.
Note that if you do choose to keep a credit card instead of canceling it, the card shouldn’t be left entirely unused with a zero balance because the card issuer may close an inactive account or decrease your credit limit.
Why closing a card could impact your credit
Canceling a credit card could cause a credit score drop. There are two main reasons for this—your credit utilization rate and the length of your credit history. When you cancel a credit card, especially one you’ve had for years, this can reduce the average age of your accounts. Canceling a card can also lower the amount of available credit you have, which can increase your credit utilization rate.
Here’s more information on how these factors can affect your credit and help you determine whether or not to close your credit card account:
Your credit utilization rate could skyrocket
The biggest factor to consider when weighing the pros and cons of canceling your credit card is the impact it may have on your credit utilization rate, which is the percentage of available credit you have used. Experts recommend keeping your utilization ratio below 30 percent.
Even if you aren’t making purchases on your credit card, that available credit is helping to boost your credit utilization rate, which accounts for 30 percent of your credit score. The more available credit you’re using, the worse off your credit score will be.
There’s an easy formula you can use to determine your credit utilization ratio.
To understand how your credit score could be affected by closing a credit card, here’s a helpful example. Let’s say you have two credit cards:
- One has a $3,000 limit and a $3,000 balance (this is the money you owe).
- The other has a $3,000 limit and $0 balance.
- Your credit card utilization rate between both cards is 50 percent ($3,000 total balance divided by $6,000 total limit multiplied by 100 = 50 percent utilization).
- However, if you close the credit card with the $0 balance, your credit utilization rate jumps to 100 percent ($3,000 total balance divided by $3,000 total limit multiplied by 100 = 100 percent utilization).
Before you close a credit card, take some time to determine what your credit utilization ratio would be. If that number will jump significantly, it may be a better idea to keep your unused card open until you can pay down your total credit card balance.
The length of your credit history could decrease
The longer you’ve had a credit card open, the better. This helps to build your credit history, which accounts for 15 percent of your credit score. If you have a positive history associated with your credit card paired with years of having that card in your name, it’s a good idea to keep that card open and in use, as it improves the length of your credit history.
One easy way to keep a credit card in use without driving up your balance is to only use it for recurring payments for things like streaming services or other subscriptions. That way, you’ll know exactly how much is going on that card each month and can easily pay off the balance in full.
When it might be a good idea to close your credit card
On the other hand, there are compelling reasons to cancel your unused credit card depending on your financial situation. If the temptation to use a card is too high or there’s a pricey annual fee, it may be a good idea to cancel. Here are a few instances when it might be a good idea to close your credit card account:
The card has a high annual fee
If you’re charged a high annual fee by your credit issuer, canceling may be a smart money move. However, it’s worth trying to have the fee waived before you decide to cancel, especially if you receive rewards through the card such as travel credits and perks. Call your credit card issuer to ask for the annual fee to be waived and mention that you’re considering closing your account. It never hurts to ask.
You’re a victim of fraud
If your credit card was stolen or lost, your card issuer will typically close the account and issue a new card. However, if a business allowing unauthorized charges even after you’ve notified the business about the issue, closing the card might be in your best financial interest.
You’re going through a divorce
If you’re separated or getting a divorce, it’s a good idea to close any accounts you share as you may be saddled with a credit card balance your ex has accrued on the account.
You’re out of debt
Everyone is different, and for some, the temptation to keep a credit card and not use it is too high. For those struggling to get out of debt or for those who recently climbed out of credit card debt, it might be a good idea to cancel your unused credit card and stick to using cash or your debit cards to avoid sinking back into revolving credit card debt.
How to cancel your credit card
If you do decide to close your credit card, there are a few steps you need to take to ensure you’ve properly closed your account. Be sure to close your credit card by sending a written notice to your card issuer. Keeping a paper trail is a great way to keep a record of when the account was closed if you need to contest any information on your credit report down the line. After your card has been closed, check your credit report 30 – 45 days later to make sure the card is reported as “closed” and dispute any incorrect information you may find.
Bottom line: It depends on your financial situation
Everyone’s financial situation is different. For some, having unused credit cards may be no temptation whatsoever, but for others, the knowledge of having a card available to use could be difficult to ignore. Canceling a credit card won’t necessarily change your spending habits in the long run, so it’s important to develop a healthy approach to your personal finances by creating a realistic budget and sticking to it.
No matter what your situation is, it’s important to go about canceling any unused cards in a smart way through the steps outlined above—this will ensure your financial health remains intact and your credit score is minimally impacted.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
