Is it better to cut up a credit card or cancel it?

Cut It Up or Cancel It? The Truth About Inactive Credit Cards

The question of what to do with an unused credit card – shred it or officially cancel it – is surprisingly complex. Many believe the best approach is to simply destroy the plastic, believing it’s a more secure option. However, this could be a costly mistake for your credit health. While security is undeniably important, prematurely cancelling a credit card can negatively impact your credit score in ways that shredding it simply doesn’t.

The prevailing wisdom – and generally the best advice – is to not cancel unused credit cards. This is counterintuitive to many, who assume an inactive card holds no value. In reality, your credit score benefits significantly from maintaining a longer credit history and a higher available credit limit.

Here’s why cancelling is often the wrong move:

• Credit History Length: A longer credit history is a crucial factor in your credit score. Each month your credit card remains open, even if unused, adds to this history. Closing an account, even an old one, shortens your credit history and can temporarily lower your score. This is particularly true if the card represents a significant portion of your available credit.

• Credit Utilization: Credit utilization is the percentage of your available credit you’re using. A low utilization rate is excellent for your credit score. Cancelling a card reduces your total available credit, potentially increasing your utilization rate even if your spending remains the same. For example, if you have $1000 in credit card debt across two $5000 cards (10% utilization), cancelling one reduces your available credit to $5000, thereby increasing your utilization to 20%. This significantly impacts your credit score.

• Average Age of Accounts: Credit bureaus consider the average age of your credit accounts. Cancelling an older card lowers this average, negatively affecting your score.

So, if cancelling isn’t the answer, what should you do with that dusty, unused card? The best approach is to keep the card open but inactive. To maintain the account’s activity without incurring unnecessary expenses, consider these options:

• Occasional Small Purchases: Make one small, inconsequential purchase every few months (e.g., a coffee, a magazine subscription payment). This demonstrates continued activity without accumulating debt.

• Authorized User: If you have a trusted family member or friend with good credit, consider adding them as an authorized user. Their responsible use of the card can positively impact both your and their credit scores.

• Secured Card: If you’re struggling to maintain credit card accounts, consider a secured credit card, which requires a security deposit. This can help rebuild credit history safely.

While physically destroying the card offers a sense of security against theft or fraud, it’s far less impactful than the potential damage to your credit score caused by cancellation. Prioritize your credit health by keeping the accounts open and managing them responsibly. Contact your bank or credit card company to report the card lost or stolen if security is a major concern. This allows you to maintain your credit history without the risk of unauthorized use. Ultimately, the best option is to proactively manage your credit and make informed decisions that benefit your long-term financial health.