A crowded wallet and the temptation to spend might have you thinking about canceling unused credit card accounts. In most cases, however, it's best to keep unused credit cards open so you benefit from longer credit history and lower credit utilization (as a result of more available credit).
Closing a credit card with a zero balance may increase your credit utilization ratio and potentially drop your credit score. In certain scenarios, it may make sense to keep open a credit card with no balance. Other times, it may be better to close the credit card for your financial well-being.
If you close any revolving account, it can hurt your score. This is particularly if you have an unpaid balance or if you've had the account a long time (compared to your other accounts.)
If you pay off all your credit card accounts (not just the one you're canceling) to $0 before canceling your card, you can avoid a decrease in your credit score. Typically, leaving your credit card accounts open is the best option, even if you're not using them.
Keeping the card open can help maintain a healthy credit score by contributing to your credit history and utilization ratio. However, there are valid reasons to consider canceling, such as high annual fees or difficulties managing multiple accounts.
So, you should pay your card's statement balance in full each month by the payment due date if you want to avoid interest charges. And, as long as you pay in full by the payment due date, you'll reap the benefits of the grace period.
You don't want to close an account if it makes your credit utilization ratio go up, especially to more than 30%. Alternatives to closing a credit card include upgrading or downgrading the credit card in question to better suit your needs.
Keeping a low credit utilization ratio is good, but having too many credit cards with zero balance may negatively impact your credit score. If your credit cards have zero balance for several years due to inactivity, your credit card issuer might stop sending account updates to credit bureaus.
It's important to pay off all your credit card balances before closing a credit card — not just the one you're closing. This will ensure that your credit utilization (which makes up 30% of your FICO Score) isn't impacted.
If your CUR is 0%, it shows lenders and credit card issuers that you aren't making any purchases on your credit card. Remember, it's important to use your card. "When a credit card account is reported with a zero balance, some scoring models will look at a zero balance as if the card is not being used," Droske says.
Closing one credit card account likely won't make a big enough dent to hurt your chances of approval with future lenders, especially if you'll still have another form of revolving credit open, but it's worth being mindful of this if you want the highest credit score possible.
Most of the time, paying off your credit card in full is the best approach. Carrying a balance on your credit card does not help your credit score. Doing so can also result in extra fees and interest charges. CNBC Select explains why and how carrying a balance can harm your financial health.
Some people, however, have concerns that a zero balance can harm their credit scores. It's not true – a zero balance won't bring down your credit score, unless however, you have a zero balance because you haven't been using your credit card.
Instead of canceling a card, you can keep the account active by using it to make one or two small purchases a month. If keeping the card in your wallet is too much temptation: Cut up the card. If you don't cut up your card, store it in a safe place where you won't be tempted to use it.
The mere act of closing a bank account doesn't have a direct impact on your credit. The Consumer Financial Protection Bureau confirms that the three major credit bureaus — Experian, Equifax and TransUnion — don't typically include checking account history in their credit reports.
Your credit utilization ratio goes up
By closing a credit card account with zero balance, you're removing all of that card's available balance from the ratio, in turn, increasing your utilization percentage. The higher your balance-to-limit ratio, the more it can hurt your credit.
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
The lower your balances, the better your score. Carefully consider how you want to use your available credit based on your goals and your personal situation. Keep in mind, however, that the best way to maintain a high credit score and lower your financial risk is to pay your balances in full and on time, every time.
Owning more than two or three credit cards can become unmanageable for many people. However, your credit needs and financial situation are unique, so there's no hard and fast rule about how many credit cards are too many. The important thing is to make sure that you use your credit cards responsibly.
There's no such thing as “too long” to keep a credit card. If you're happy with your card and getting a lot of value out of the rewards, there's no harm in sticking with it. Likewise, if you've stopped using a card and it doesn't charge an annual fee, in most cases it's preferable to keep the account open.
Closing a credit card account can negatively impact your credit, though how much it hurts your score depends on your credit history. Factors like how many other accounts you have open, how long you've had the accounts and the balances can all play a role.
If you have a zero balance because you simply never use it, your credit card may stop sending updates to the credit bureaus, and that inactive credit card could potentially lower your credit score over time.
The 15/3 rule, a trending credit card repayment method, suggests paying your credit card bill in two payments—both 15 days and 3 days before your payment due date. Proponents say it helps raise credit scores more quickly, but there's no real proof. Building credit takes time and effort.
Key points on 0% credit cards
When your introductory or promotional offer comes to an end, your remaining balance will be charged at the card's standard rates. To avoid paying higher interest rates, plan ahead and try to pay off your balance in full before the 0% offer ends.