Closing an old credit card: smart or risky?

Deciding whether to close an old credit card can be a difficult task. After all, credit cards affect your credit score, your spending habits, and sometimes even your sense of financial security.

But if you don’t actively use a particular card, you might wonder if it’s worth keeping it, especially if you think there are better credit cards out there for you. Here we’ll look at the pros and cons to help you decide whether you want to keep that card open or ultimately say goodbye.

Consider how your credit score will be affected

Closing a card can have a bigger impact on your credit score than you might expect. Factors such as credit utilization, payment history and length of credit history affect your credit score. Closing an old card may remove an existing credit limit, which could affect the “Credit History” section of your score.

Credit utilization (basically the percentage of available credit you use) also plays a key role. Closing a card will reduce your total available credit, potentially increasing your utilization ratio.

For example, if you have a $10,000 credit limit for two cards and use $1,000, your utilization rate is only 10%. But if you close one of those cards and your total credit limit drops to $5,000, you’ll use 20% of your available credit, which could lower your score. This may be a small difference, but if you are planning a major purchase such as a house or car soon, every point counts.

Consider the annual cost of the card and your benefits

One reason many people consider closing an old card is to avoid paying an annual fee, especially if they no longer use the card’s benefits or rewards. If your card has an annual fee but you’re not taking advantage of its benefits, it may be a good idea to close that card account.

But before you make a decision, ask yourself whether you’ll miss out on valuable benefits if you close it. Some cards offer excellent benefits that can actually offset the annual fee or even provide more value than you pay. For example, if your card includes travel credits, bonus points, or free services, you may still get your money’s worth even if it spends most of the year collecting dust.

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Evaluate how this affects your spending habits

Keeping an old credit card open or closing can also affect your spending habits. For some, having an extra card lying around can lead to occasional “just because” purchases. If that sounds familiar, closing the card can be a smart way to minimize impulsive spending.

But if you’ve been managing your finances well with multiple cards, keeping the card open can help you maintain your financial health by continuing to diversify your lines of credit.

For people who mainly use debit card or cash, keeping an extra credit card may seem pointless. But if you’re disciplined, keeping the card open can increase your credit mix without increasing your spending.

Are you planning to take major financial steps?

If you’re about to make a big financial move, such as buying a home, refinancing a loan or financing a new car, your credit score will come under scrutiny. And because your score can take a hit if you close a card, you may want to wait until big moves are completed.

Lenders like to see a solid, stable credit history, so sudden changes to your credit profile can raise questions. Keeping the card open for the time being will ensure that your credit score remains as high as possible during the application process. Once your major financial moves are complete, you can reevaluate.

Discover the possibility to downgrade or use the card occasionally

If you are unsure about closing your card, you can downgrade to a card from the same product line free of charge, if the option is available. This allows you to keep your credit history intact without having to pay an annual fee. Additionally, making small purchases on the card periodically, such as a streaming subscription or a small monthly bill, can keep the card from becoming inactive, helping you maintain a long, positive credit history.

Keeping the card active with small, manageable transactions also shows the credit bureaus that you are using credit responsibly. Make sure you pay it off every month to avoid interest charges.

The decision to close an old credit card isn’t black and white. For some, closing a card is the right choice to eliminate fees and avoid temptation. For others, keeping an older card open can significantly benefit their credit profile.

Ultimately, consider your current financial goals, any upcoming big money moves, and your personal spending habits. A little planning can help you decide what will best support your financial well-being.