Is it better to close credit cards or keep them open?

The Great Credit Card Conundrum: Close or Keep?

The question of whether to close unused credit cards is a common one among financially savvy individuals. While the urge to declutter our financial lives and eliminate potential debt traps is understandable, closing inactive credit cards might not always be the best financial move. In fact, maintaining those seemingly superfluous pieces of plastic can significantly benefit your credit score.

The primary reason stems from two crucial elements of your credit report: credit history length and credit utilization ratio. A longer credit history demonstrates to lenders your responsible management of credit over time. This longevity builds trust and indicates a lower risk of default. Closing old cards, even if unused, shortens your credit history, potentially impacting your creditworthiness negatively.

Your credit utilization ratio – the percentage of your available credit you’re using – is equally important. This is calculated by dividing your total credit card balances by your total available credit. A lower utilization ratio is significantly better for your credit score. For example, if you have $10,000 in available credit and only use $1,000, your utilization is 10%, a healthy range. However, if you close cards, your available credit decreases, potentially increasing your utilization ratio even if your spending remains the same. A high utilization ratio signals to lenders that you might be overextended financially.

So, how can you reap the benefits of maintaining those unused cards without incurring unnecessary debt? The key is to keep them active without actually using them for spending. A simple and effective strategy is to automate a small, recurring payment on one or two of your least-used cards. This could be as little as $5-$10 per month for a subscription service you already use, or even a small recurring donation to a charity. The crucial step is to ensure you promptly pay off the entire balance each month, preventing any interest charges. This small, consistent activity demonstrates responsible credit management to credit bureaus without impacting your budget significantly.

In conclusion, while the temptation to close unused credit cards is strong, the long-term benefits of maintaining them often outweigh the perceived inconvenience. By implementing the simple strategy of automating a small, recurring payment and diligently paying it off in full each month, you can actively protect and enhance your credit score, securing better financial opportunities down the line. Consider the long-term implications before making the decision to close any inactive credit card. A few extra minutes of proactive management can significantly contribute to a healthier financial future.