Should you keep unused credit cards active?
Whether you use a corporate card or a personal one, credit cards can offer benefits, cashback, and protection from credit card fraud. They offer a grace period for interest-free payback and help you build credit. They also offer the opportunity to build up a lot of debt. That begs the question, what should you do if you have a credit card you no longer use that is taking up space in your wallet, and you’ve paid off the card balance?
You might think the responsible thing to do is to close the account and use your debit card or a different credit card. You may want to keep credit cards open even if you don’t use them for a few reasons. When you cancel a credit card, it can negatively impact your credit score. By understanding what makes up your credit score, and what contributes to good credit habits, we can learn what impact closing a credit card account may have.
Understand what makes up your credit score
The Canadian credit bureaus detail the components that make up your credit score. Understanding how these elements work together can help you improve your credit score and understand your credit report.
- A large part of your credit score is dependent on your payment history. Do you pay on time, do you repay in full, do you pay late, or have you missed payments? Have your accounts gone to collections?
- What portion of your available credit do you use? If you max out a card with a $10,000 credit limit, you use 100% of your credit. However, if you only have a $500 card balance on that same credit card, you are using 5% of your available credit. Your credit utilization rate demonstrates how much of your credit you are using. A lower rate is better for your credit score.
- How long you have had credit cards and lines of credit plays an important factor in your credit score. The longer the credit history, the better.
- Having different types of credit, and if you have managed them well plays a factor.
- Finally, the amount of checks on your credit by lenders can impact your score. Hard credit checks happen when you open new lines of credit. Soft checks – such as when you check on your own credit – do not impact your score.
What should you do if you no longer want to use a credit card?
See if there is an alternative
Call your issuer to understand other card offerings to see if there is a better alternative for you. If your credit card has an annual fee, ask the company to waive it or see if there is a no-fee card you can downgrade to. Keeping an account with that credit card company open will maintain the history.
Evaluate how old the credit history is and how much of an impact it could have
If the unused card is one of your oldest credit accounts, you should think twice before closing. Cancelling a card with a long credit history has a bigger impact than closing one that has only been open a year.
Consider upcoming purchases or activities that would require a strong credit score
Are you trying to qualify for a mortgage or buy a new car on financing? Even moving to a new rental apartment could trigger a credit check. Having a good credit score in these cases will have a positive impact. Your credit score determines the interest rate you qualify for. It also tells lenders (or landlords) how trustworthy you are with finances. It can also be the reason you get approved or declined.
What if a lender closes the account for inactivity
Putting your unused card in a sock drawer and forgetting about it may be an excellent way to avoid the temptation to use it. Just be forewarned, a lender can close your account after a period of inactivity.
Check your cardholder agreement to understand if there are any inactivity fees detailed in the credit card information. If a lender closes an account for inactivity, this may affect your credit score. A closure could impact your credit utilization rate and credit history.
Learn skills for responsible credit use
Whether using a company credit card or a personal one, here are some tips to help you build responsible credit habits:
Keep credit cards open if they are older accounts.
Keeping your oldest accounts active can help maintain a good credit score. Showing a long history of responsible credit indicates good credit use. Changing or downgrading your card with the same lender will keep the credit history active. Putting one small recurring payment on a card to keep it active may help prevent a closure for inactivity.
Lower your utilization rate
Instead of maxing out your cards and lines of credit and struggling to repay them, try to use less of your available credit. If you frequently overspend, remove your credit card number from your browser’s auto-fill. You can also pay your bill more frequently. If you accept an offer of a limit increase and keep your spending low. Instead, to decrease your utilization, act like you don’t have a new spending limit.
Don’t carry a balance
Make a plan to get your balance to zero, then commit to paying it off in full each month. Credit cards can be great tools, but not at the expense of credit card debt and interest charges. Check your credit card statement to understand how much you are paying in Interest when you carry a balance.
Don’t apply for too many cards in a short period
Credit card churning has gained popularity as a way to maximize rewards points. Points enthusiasts may apply for many new cards to earn the incentives. However, beware of applying for too many cards in a short period. Review credit card details carefully to understand the requirements for receiving sign-on bonuses. Frequent hard credit inquiries can hurt your credit score.
Build up a cash buffer
Try flipping things around if you rely on your pay cheque to pay off your monthly card balance. Work on building a cash savings buffer of one month’s expenses. That buffer will ensure you can cover the costs of your bills and purchases and not need to rely on credit to get to the next payday.
Seek counselling if needed.
Credit counselling services are available. Seek a trained counsellor, such as those at Consolidated Credit Canada, to help you improve your credit habits.
Final thoughts
Responsibly managing credit can be very good for your financial well-being and can improve your credit score. A great credit score can lead to lower interest rates and better loan approvals. Keeping credit cards open instead of closing the accounts can help you keep a strong credit history which impacts your score. Be sure to think twice before you close that old card.