Is it better to cancel a credit card or just stop using it?

Credit Card Management: Is it Better to Cancel or Stop Using Unused Accounts?

When it comes to managing credit cards, the choice between cancellation and inactivity can impact your credit health. While closing unused cards might seem like a quick solution, it’s important to consider the potential consequences before making a decision.

Benefits of Leaving Unused Credit Cards Open:

• Lengthens Credit History: Keeping unused accounts open contributes to the length of your credit history, which is a crucial factor in calculating your credit score. A longer history indicates to lenders that you have a track record of responsible credit use.

• Lowers Credit Utilization Ratio: Credit utilization ratio measures how much of your total available credit you are using. By leaving unused cards open, you increase the total amount of available credit, resulting in a lower utilization ratio. This is advantageous because a high utilization ratio can negatively impact your credit score.

Maintaining Active Usage:

To ensure your unused credit cards remain healthy, it’s advisable to activate them occasionally for small purchases or recurring bills. This activity demonstrates to credit issuers that you are still using the card and that it’s not dormant. However, avoid using the cards for large purchases or excessive spending to keep your credit utilization ratio in check.

When to Cancel a Credit Card:

While keeping unused cards open is generally preferred, there are certain circumstances where cancellation might be a better option:

• To avoid annual fees: Some credit cards charge annual fees for maintaining the account. If you’re not using the card and don’t foresee using it in the future, it might be cost-effective to cancel it.

• To reduce credit exposure: If you have multiple credit cards with high balances, closing an unused account can reduce your overall credit exposure and potential financial liability.

• To protect against fraud or identity theft: If you suspect your credit card has been compromised or stolen, canceling the account can limit the potential for unauthorized use.

Conclusion:

In most cases, it’s advisable to leave unused credit cards open to strengthen your credit history and lower your credit utilization ratio. However, if you must cancel a card, consider the potential consequences and do so strategically. By carefully managing your credit cards, whether active or inactive, you can maintain a healthy credit profile and improve your financial standing.