Does closing unused credit cards hurt your credit score?

The Great Credit Card Close-Down Conundrum: Does Closing Unused Cards Hurt Your Score?

Many people find themselves with a drawer full of unused credit cards – relics of past promotions or accounts opened for specific purposes. The question often arises: should I close these dormant accounts? The short answer is: it depends. While the popular belief is that having more credit cards boosts your score, the reality is more nuanced, and hinges critically on the size of your credit limits.

The myth of “more is better” regarding credit cards is precisely that – a myth. Your credit score isn’t simply a tally of the number of cards you hold. Instead, credit scoring models focus heavily on credit utilization – the percentage of your total available credit that you’re using. Closing a card with a small credit limit has a negligible effect on this percentage, and therefore minimal impact on your score. Think of it this way: if you have $10,000 in available credit and close a card with a $500 limit, your total available credit only drops by 5%, a barely perceptible change.

However, the situation changes drastically when closing a card with a significant credit limit. Suppose you close a card with a $5,000 limit out of a total available credit of $10,000. This reduces your available credit by 50%, a substantial drop. Even if you haven’t been using that card, closing it suddenly increases your credit utilization ratio, potentially causing a noticeable dip in your credit score. This occurs because lenders view a reduced credit limit as increased risk, even if your spending habits remain unchanged.

Therefore, the decision of whether or not to close an unused credit card requires careful consideration of the card’s credit limit. Before closing any card, check your credit report to determine the overall impact closing it will have on your credit utilization. Tools available online can help you calculate this. If closing the card results in a significant increase in your credit utilization ratio (generally, exceeding 30% is considered high-risk), it’s advisable to keep the card open, even if you don’t use it.

In summary, while the age of your credit accounts contributes to your credit score, simply possessing many cards doesn’t automatically improve it. The focus should be on maintaining a healthy credit utilization ratio. Closing unused cards with low credit limits is unlikely to cause significant harm, but closing cards with substantial limits can negatively affect your score. Always weigh the potential risks against the benefits before making a decision. A little bit of planning can save you from an unexpected credit score slump.