Is it better to cancel a credit card or keep it?

To Cancel or Not to Cancel: The Great Credit Card Conundrum

Unused credit cards often sit dormant in wallets, gathering dust and tempting their owners to cancel them. However, before you reach for the scissors, consider the potential consequences. The decision to cancel a credit card is a strategic one, requiring a careful weighing of pros and cons that extend beyond the simple act of eliminating a piece of plastic.

On the one hand, canceling a credit card seems like a straightforward solution to clutter and potential fees. Why keep a card you never use, incurring annual fees or even incurring a negative impact on your credit utilization ratio if it is sitting there with a balance of zero? The logic is appealing, especially for those striving for a minimalist lifestyle or managing multiple accounts.

However, the benefits of retaining an unused credit card can be significant, particularly in the long term. Here’s a breakdown of the key factors to consider:

Reasons to KEEP the card:

• Credit History: The length of your credit history is a crucial factor in your credit score. Canceling a card, especially an older one, shortens your credit history, which can negatively impact your score. This is particularly true if the card represents a significant portion of your overall credit history.
• Credit Utilization Ratio: This ratio measures the amount of credit you’re using compared to your total available credit. Closing a card reduces your total available credit, potentially increasing your utilization ratio, even if you have zero balances on your other cards. A high utilization ratio can negatively affect your credit score.
• Rewards and Benefits: Even if you don’t use a card frequently, it might still offer valuable perks. These could include airline miles, cashback rewards, or other benefits that accumulate over time, even with minimal spending. These perks can be lost if you cancel the card.
• Future Credit Access: A longer credit history with diverse credit accounts can improve your chances of securing loans or other credit products in the future. Lenders often prefer applicants with a demonstrated history of responsible credit management, which includes maintaining active accounts.
• Emergency Fund Access: Having an available credit line, even if unused, can act as a crucial safety net during unexpected financial emergencies.

Reasons to CANCEL the card:

• Annual Fees: If the card charges a high annual fee that outweighs its benefits, canceling it makes financial sense. Many reward cards offer fee waivers for the first year, but after that, the annual fee needs to be thoroughly weighed against the rewards earned.
• High Interest Rates: If you have a card with a high interest rate and you’re struggling to manage your finances, cancelling may limit the temptation to use it.
• Unnecessary Clutter: For some, the sheer inconvenience of managing multiple accounts outweighs the potential benefits. However, consider digitizing your financial information or using a dedicated financial management app to overcome this obstacle.

The Verdict:

The decision of whether to cancel a credit card is highly individual. Before canceling, carefully consider your credit history length, credit utilization ratio, the potential loss of rewards and benefits, and your future credit needs. If the annual fees are excessively high or the card poses a temptation for overspending, canceling may be the best option. However, for most, maintaining a healthy credit profile often outweighs the minor inconvenience of having a few inactive cards. A balanced approach, where only truly burdensome accounts are eliminated, is often the wisest strategy. If you’re unsure, consulting a financial advisor could provide valuable insights tailored to your specific financial situation.