If you have an old credit card that you never use, you might be tempted to scrap it. After all, debt is bad right? Well, cancelling your card has some consequences related to your credit score, so you’ll want to consider all of your options first. Here’s what you need to know.
Why you shouldn’t cancel your old credit card
Table of Contents
Closing a credit card can negatively affect your credit score, which impacts your ability to qualify for loans at favorable rates. Here’s how closing an old card affects your credit:
- Lowered credit utilization: 30% of your score is based on your credit utilization ratio, which is a measure of how much of your total credit you are currently using. For example, a $1,000 purchase on a credit line of $10,000 gives you a credit utilization ratio of 10%. Cancelling a card lowers your credit limit, however, and could nudge you past 30% credit utilization, which will hurt your score.
- Decreased average age of accounts: 15% of your credit score is based on the length of your credit history, or how long you’ve been actively using credit. Closing an older credit card account will reduce the average age of your accounts and therefore reduce your score further.
- Credit mix: 10% of your credit score is related to credit mix. This is less of a concern if you have other cards, but it could have a bigger impact if you’re winding down the only credit card that you have.
G/O Media may get a commission
That all said, there are valid reasons why you might cancel an old, unused card:
- To avoid a steep annual fee (typically $500 or more for premium cards)
- You already have other lines of credit that will mitigate the impact to your credit score
- To extricate yourself from sharing a card with someone else (i.e., divorce)
Consider a card downgrade if you have an annual fee
If your card has a fee, Ted Rossman, senior credit card industry analyst at Bankrate.com, recommends calling your lender and asking for a downgrade (you can refer to it as a “product change” when talking to the company). Just be sure to confirm whether your existing card’s credit history will be carried over to the new card.
Use it or lose it
Whether you use a downgraded card or just keep the one you already have, use it at least once every three months, as credit card companies will close inactive accounts. To avoid this, consider using your card for a small recurring purchase, like a Netflix subscription, and setting up your bank account so that it’s automatically paid off every month. Then put the card away somewhere where you’ll forget it, like in a drawer, so that you won’t be tempted to use it.