Is it bad to stop using a credit card?

The Credit Card Paradox: Why Closing That Old Card Might Hurt You

We all have them: credit cards lurking in the back of our wallets, relics of past shopping sprees or introductory offers long since expired. The temptation to declutter and simplify by closing these accounts is strong, especially if they’re unused and carrying no balance. But before you reach for the scissors, consider this: closing a credit card, even one you rarely use, could actually negatively impact your credit score.

It seems counterintuitive, right? Why would not using something hurt your creditworthiness? The answer lies in the complex algorithms that scoring agencies like FICO and VantageScore use to assess risk. Here’s why keeping those old, unused credit cards open can be a smart financial strategy:

1. Boosting Your Credit Utilization Ratio:

This is perhaps the most significant reason to think twice before closing a card. Your credit utilization ratio is the amount of credit you’re using compared to your total available credit. It’s a crucial factor in determining your credit score, often accounting for around 30% of the overall calculation.

Imagine you have two credit cards: Card A with a $5,000 limit and a $500 balance, and Card B with a $3,000 limit and a $0 balance. Your total available credit is $8,000 ($5,000 + $3,000), and your credit utilization is 6.25% ($500 / $8,000). A low credit utilization is good, indicating you’re responsible with borrowing.

Now, if you close Card B, your available credit suddenly drops to $5,000. Your credit utilization then jumps to 10% ($500 / $5,000), even though you haven’t spent any more money. This increase in credit utilization can ding your credit score, signaling to lenders that you might be becoming more reliant on credit.

2. Lengthening Your Credit History:

The age of your credit accounts also plays a vital role in determining your creditworthiness. A longer credit history demonstrates to lenders that you have a proven track record of managing debt responsibly over time. Closing an older credit card, especially one of your first cards, effectively shortens your credit history and removes that positive data from your credit report.

3. Maintaining a Diverse Credit Mix:

While not as impactful as utilization and payment history, having a diverse mix of credit accounts (credit cards, loans, mortgages) can subtly benefit your credit score. Closing a credit card reduces the diversity of your credit portfolio, though this typically has a smaller impact compared to the other factors.

So, How Do You Keep Those Cards Active Without Overspending?

The key is to keep the cards open without falling into the trap of unnecessary spending and accumulating debt. Here are some strategies:

• Set up small, automated payments: Link the card to a recurring bill, such as a streaming service subscription or a small monthly donation. This ensures the card is used regularly, keeping it active.
• Make infrequent, small transactions: Use the card for a small purchase every few months, like a coffee or a tank of gas. Pay it off immediately to avoid interest charges.
• Monitor your accounts: Regularly check your statements for any fraudulent activity and to ensure you’re staying within your budget.

When Is it Okay to Close a Credit Card?

While keeping old cards open is often beneficial, there are exceptions:

• High annual fees: If the card charges a significant annual fee that outweighs the potential benefits to your credit score, consider closing it.
• Unmanageable temptation: If you struggle with overspending and find having the card readily available leads to debt accumulation, closing it might be the best option for your financial well-being.
• Fraudulent activity: If the card has been compromised or subject to fraudulent activity, closing it is a necessary security measure.

The Bottom Line:

Closing a credit card is a decision that requires careful consideration. While simplifying your finances can be appealing, the potential negative impact on your credit score could outweigh the convenience. By strategically maintaining open, yet seldom-used, credit cards, you can boost your available credit, lengthen your credit history, and ultimately improve your overall financial standing. So, before reaching for those scissors, take a moment to weigh the pros and cons and determine if keeping that old card open is the right move for you.