Is it good to have lots of credit cards you don t use?
Is it good to have lots of credit cards you don t use?
Is It Good to Have Lots of Credit Cards You Donāt Use?
Many Americans often wonder if having multiple credit cardsāeven those they donāt frequently useāis a smart financial move. With the average U.S. consumer holding several credit cards, questions arise about how unused cards impact credit scores, spending habits, and overall financial health. This article dives into the advantages and disadvantages of possessing numerous credit cards you donāt use, helping you understand whether keeping them is beneficial or detrimental.
Why Do People Hold Multiple Credit Cards?
Before exploring the pros and cons of unused credit cards, itās helpful to understand why people accumulate them in the first place. Some common reasons include:
- Building credit history: Multiple credit cards can help establish a longer and more diverse credit history.
- Maximizing rewards: Different cards offer varying rewards, such as cashback, travel points, or discounts on specific purchases.
- Credit utilization management: More available credit means lower utilization ratios if balances are managed properly.
- Backup options: Having backup cards is useful in case one card is lost, stolen, or declined.
- Promotional offers: Opening multiple cards can secure sign-up bonuses and introductory 0% APR periods.
How Do Unused Credit Cards Affect Your Credit Score?
Credit scores are essential for every financial milestone: buying a home, securing loans, or sometimes even landing a job. It’s critical to understand how unused credit cards fit into this picture.
1. Impact on Credit Utilization Ratio
Credit utilization refers to the percentage of available credit you’re currently using. Unused credit cards contribute to your total credit limit but typically have zero balances if unused.
This generally helps your credit score because:
- A higher total credit limit lowers your credit utilization ratio.
- Lower utilization signals to lenders that youāre not relying heavily on borrowed funds.
For example, if you have a total credit limit of $10,000 and carry $1,000 in balances, your utilization is 10%. If you add an unused card with a $5,000 limit, your total credit limit rises to $15,000, dropping your utilization to roughly 6.7%, which is better for your score.
2. Account Age and Credit Mix
Two other essential components of your credit score are the age of your credit accounts and the diversity of your credit types.
- Account age: Unused cards that you’ve had for years can increase your average account age, positively influencing your score.
- Credit mix: Maintaining several credit cards (a type of revolving credit) alongside installment loans can be advantageous as it shows you can manage various credit types responsibly.
3. Potential Risks of Inactiveness
However, unused credit cards can sometimes pose challenges:
- Some card issuers may close inactive accounts, which can reduce your total available credit and shorten your credit history.
- Sudden closures may spike your credit utilization ratio, potentially triggering a drop in your score.
Reasons to Keep Unused Credit Cards
If youāre debating whether to keep your unused credit cards, here are some benefits worth considering:
1. Increasing Available Credit
As explained earlier, more available credit usually means better credit utilization rates, which are crucial for maintaining a healthy credit score.
2. Access to Emergency Funds
Unused cards can serve as a financial safety net during unforeseen emergencies without requiring you to instantly use available cash or personal loans.
3. Preserving Credit History
Older credit cards contribute positively to your credit age, a factor that accounts for about 15% of your FICO score calculations. Closing an old credit card can shorten your credit history and potentially lower your score.
4. Earning Rewards Without Spending
Some credit cards give you perks simply for holding them, such as:
- Annual loyalty points
- Free credit score monitoring
- Access to exclusive events or offers
5. Avoiding Credit Inquiries
Keeping an unused card means avoiding the need to apply for new credit that would trigger hard inquiries, which might temporarily lower your score.
Drawbacks of Having Lots of Unused Credit Cards
Although unused credit cards can be advantageous, theyāre not without downsides. Hereās what to watch out for:
1. Annual Fees and Hidden Costs
Some credit cards charge annual fees, which you may be paying for even if you donāt use the card. These fees can add up with multiple cards and erode your financial benefits.
2. Fraud Risk and Monitoring Challenges
Unused accounts remain vulnerable to unauthorized transactions, identity theft, or fraudulent charges. Regularly monitoring several cards can become cumbersome, increasing the chances of missing suspicious activity.
3. Potential Negative Impact from Account Closures
Credit card issuers may close inactive accounts without notice, which can:
- Reduce your total available credit suddenly.
- Decreases the average age of your credit accounts.
- Increase your credit utilization ratio overnight.
4. Temptation to Overspend
While some keep unused cards deliberately, others may end up using them impulsively, leading to debt accumulation.
What Financial Experts Suggest About Unused Credit Cards
Financial advisors often recommend a balanced strategy when it comes to unused credit cards:
- Keep older cards with no annual fees: These help preserve credit age and keep utilization low without monthly costs.
- Close cards with high fees that you donāt use: Weigh the cost vs. benefits of rewards before deciding.
- Use every card occasionally: Even small monthly purchases can keep accounts active and prevent closures.
- Monitor accounts regularly: Use budgeting apps or credit monitoring tools to stay on top of all your card activity.
How to Decide Which Credit Cards to Keep or Cancel
To make a smart choice around your unused credit cards, consider these factors:
1. Annual Fees vs. Benefits
Ask yourself if the rewards or perks outweigh the costs you pay annually. Cards with annual fees but little to no use usually arenāt worth keeping.
2. Card Age
Keep your oldest cards open, especially those with zero fees, to maintain a long credit history.
3. Credit Limit
Cards with high credit limits can help keep utilization ratios low. Closing them may have a larger negative impact on your score.
4. Usage History
If a card has rarely been used but offers valuable perks or credit-building potential, consider making small purchases with it.
5. Issuer Relationship
Maintaining a positive relationship with banks that issue your cards might benefit you with better terms or offers in the future.
Tips for Managing Multiple Credit Cards Responsibly
Holding numerous credit cards, used or not, demands smart management to avoid common pitfalls. Here are some best practices:
- Automate minimum payments: Set up autopay to avoid any late fees or credit score damage.
- Track spending habits: Use apps or spreadsheets to monitor balances and due dates.
- Set reminders to use cards occasionally: Even small purchases help keep the account active.
- Review statements regularly: This helps detect fraudulent activity early.
- Avoid applying for too many cards at once: Multiple hard inquiries can reduce your score.
Common Questions People Ask About Unused Credit Cards
Will Closing Unused Credit Cards Hurt My Credit Score?
Potentially, yes. Closing a credit card reduces your total available credit and may increase your credit utilization ratio, which can negatively impact your score. It can also shorten your average account age if the card is old. However, if the card has an annual fee and you donāt use it, the cost may outweigh the credit impact.
Can I Have Too Many Credit Cards?
Thereās no official limit on how many credit cards you can have, but managing dozens can get complicated, increasing the risk of missed payments or fraud. Each new application triggers a hard inquiry, which can temporarily lower your credit score.
Do Credit Card Issuers Close Accounts Automatically?
Yes, many issuers close accounts that remain inactive for extended periods (often 12-24 months). This is why using unused cards occasionally is advisable to keep them open.
Is It Better to Use a Few Cards or Many Cards Regularly?
Itās generally better to use a few cards regularly rather than many cards sporadically. This helps keep your credit active, makes tracking easier, and can improve rewards optimization.
Can Keeping Unused Cards Help During Loan Applications?
Yes. Lenders look favorably on applicants with low credit utilization and a long, positive credit history, both of which can be boosted by keeping unused cards open and in good standing.
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Is It Good to Have Lots of Credit Cards You Donāt Use?
Managing your personal finances can be challenging, especially when it comes to credit cards. Many Americans wonder if having multiple credit cards they donāt regularly use is beneficial or harmful. On one hand, unused credit cards might help improve your credit score by increasing your overall credit limit, which can lower your credit utilization ratio. On the other hand, too many unused cards can lead to confusion, potential fees, or even security risks. Let’s explore whether holding several unused credit cards is a smart financial strategy and answer common questions to help you make an informed decision.
Conclusion
Having several unused credit cards can be both good and bad depending on how you manage them. On the positive side, unused cards can increase your total available credit, potentially improving your credit score by lowering your credit utilization rate. They also preserve your credit history length, which is valuable for credit scoring models. However, keeping too many unused cards may expose you to annual fees, increase the risk of fraud, and complicate credit management. The key is to strike a balance: keep cards that offer benefits and no fees, and consider closing those that you donāt need or that could harm your financial health. Regularly reviewing your credit report and staying organized ensures you make the most of your credit cardsāto support your financial goals, not hinder them. If youāre looking to improve credit or earn rewards, choose your credit cards wisely and use them strategically rather than accumulating a large number of unused accounts.
Frequently Asked Questions
1. Does having many unused credit cards hurt my credit score?
Not necessarily. Unused cards can actually help your credit score by increasing your overall credit limit, which lowers your credit utilization ratio. However, too many cards might hurt if they lead to missed payments or if issuers close accounts.
2. Should I keep credit cards I don’t use to improve my credit score?
Yes, keeping cards with no annual fees can help keep your credit history longer and increase your available credit, both of which are good for your credit score.
3. Can too many credit cards lead to security risks?
Yes. The more cards you have, especially unused ones, the higher the risk of fraudulent activity going unnoticed unless you monitor your accounts regularly.
4. Do credit card issuers charge fees on inactive cards?
Some issuers charge annual or inactivity fees, so it’s important to review each cardās terms and close those that are costly without benefits.
5. Will closing unused credit cards lower my credit score?
It might if you reduce your available credit significantly or shorten your credit history. Consider the impact before closing cards.
6. How many credit cards are recommended to have?
Thereās no magic number; many experts suggest 3-5 cards can balance credit benefits and ease of management.
7. Can having multiple cards improve my reward points?
Yes, different cards offer various rewards. Using multiple cards strategically can maximize cash back, travel miles, or other perks.
8. Does applying for many credit cards hurt my credit?
Multiple recent credit applications can temporarily lower your score due to hard inquiries and may appear risky to lenders.
9. How often should I use my credit cards to keep them active?
Using each card at least once every few months can prevent inactivity closures and keep any rewards active.
10. If I don’t use a credit card, should I keep it open?
If it has no fees and a long credit history, itās generally better to keep it open to support credit score and limit.
11. Can unused credit cards affect my debt-to-income ratio?
Unused cards donāt directly affect debt-to-income ratio, which is based on income and debt levels, not credit limits.
12. Do credit card companies close inactive accounts?
Yes, many issuers close accounts that have been inactive for 12-24 months to reduce risk.
13. How does credit utilization ratio affect credit score?
Credit utilization measures how much credit you use vs. your credit limit. Lower utilization (under 30%) is better for your score.
14. Is it better to have one card with a high limit or multiple cards?
Multiple cards with combined high limits can diversify credit utilization and may benefit your credit score more than a single high-limit card.
15. Can having many credit cards make budgeting harder?
Yes. Managing multiple due dates and balances can be complicated and increase the risk of missed payments if not organized.
