Is it bad to cut off a credit card?

The Great Credit Card Closure Debate: Is It Really That Bad?

The allure of a clean, decluttered wallet is strong. That extra credit card, gathering dust since that ill-fated online shopping spree two years ago, might seem like a prime candidate for the shredder. But before you reach for the scissors, consider this: closing a credit card can surprisingly harm your credit score, even if you haven’t used it in ages. This seemingly innocuous act can have ripple effects on your financial health, impacting your ability to secure loans, rent an apartment, or even get approved for a new credit card in the future.

The primary reason closing a credit card can be detrimental lies in two key credit score metrics: credit history length and credit utilization ratio.

Credit History Length: Credit bureaus value longevity. A longer credit history demonstrates responsible credit management over time. Each credit card, regardless of its usage, adds to your overall credit history. Closing an older card, especially one you’ve held for several years, immediately shortens that history, potentially lowering your score. This is especially true if it’s one of your oldest accounts. Think of it like this: your credit score is a representation of your financial trustworthiness built over time – closing an old card removes a significant piece of that puzzle.

Credit Utilization Ratio: This crucial metric represents the amount of available credit you’re using compared to your total available credit. For example, if you have $10,000 in total credit and owe $2,000, your utilization ratio is 20%. Keeping this ratio low (ideally below 30%) is crucial for a healthy credit score. Closing a card, even an unused one, reduces your total available credit. If you maintain a consistent balance on other cards, closing one can artificially inflate your utilization ratio, potentially hurting your score. Imagine having $5,000 in credit and owing $1,000 – a 20% utilization. Closing a card that represents $2,000 of that available credit suddenly increases your utilization to 50%, a significant negative impact.

So, what’s the alternative? Keeping the card open but inactive?

Yes, and there are ways to do it strategically. You don’t need to spend excessively. Setting up a small recurring automatic payment (e.g., $1-$5 to a streaming service through the card) or making a small, occasional purchase (like a coffee once a quarter) can keep the card active and prevent it from being closed due to inactivity. This minimal activity keeps the account in good standing without negatively impacting your spending habits.

Before you close that credit card, consider:

• The age of the card: Older cards contribute significantly to your credit history length.
• Your current credit utilization ratio: Closing a card could significantly increase this ratio.
• Your overall credit score: If you’re already striving for improvement, closing a card could hinder your progress.

In conclusion, while the temptation to simplify your financial life by closing unused credit cards is understandable, it’s crucial to weigh the potential negative consequences. By understanding the impact on your credit history and utilization ratio, and employing strategies to maintain inactive cards, you can avoid the pitfalls of credit card closure and maintain a healthy credit score.