Is it bad to keep a credit card you don’t use?
Is it bad to keep a credit card you don’t use?
Is It Bad to Keep a Credit Card You Donāt Use?
If you have a credit card sitting in your drawer and rarelyāor neverāuse it, you might wonder if itās okay to just keep it. Should you cancel it to avoid fees and potential identity theft? Or is it better to hold onto it for your credit score and financial security? This is a common question for many Americans who want to protect their credit health while minimizing risks. In this article, weāll explore the pros and cons of keeping an unused credit card, address related concerns, and provide clear guidance to help you make the best decision for your financial situation.
Why People End Up With Unused Credit Cards
Before diving into whether itās bad to keep an unused credit card, itās helpful to understand how people often end up in this situation. Common reasons include:
- Opening multiple cards for rewards or sign-up bonuses but then focusing spending on one or two cards.
- Receiving a credit card from a bank or store that you donāt actively use.
- Obtaining a card during student years or as a starter card and moving on to better options.
- Keeping an old card open for credit history while preferring not to use it.
How Keeping an Unused Credit Card Affects Your Credit Score
One of the most important reasons to consider keeping a credit card you donāt use is how it impacts your credit score. Your credit score is a number lenders look at to evaluate your creditworthiness, and unused credit cards can influence it in several ways.
Positive Effects on Credit Score
- Credit Utilization Ratio: This ratio compares the amount of revolving credit youāre using versus your total available credit. By keeping a card with a credit limit open, you increase your total available credit, which can lower your credit utilization percentage and boost your score.
- Length of Credit History: Older accounts improve the average age of your credit, which is a positive factor for credit scoring models.
- Credit Mix: Having a variety of credit types, including credit cards, installment loans, and mortgages, can improve your credit profile.
Potential Negative Effects
- Unused cards can be a security risk: If you donāt monitor the card, it could be vulnerable to fraud or unauthorized charges.
- Annual fees: Some cards charge yearly fees, so keeping an unused card may cost you money.
- Temptation to overspend: Even if you donāt use it now, having available credit might encourage impulse purchases.
What Happens When You Close an Unused Credit Card?
Many people think closing unused cards is a smart way to reduce financial clutter, but it can have unintended consequences, especially on your credit score.
Impact on Credit Utilization
When you close a credit card, the total credit limit available to you decreases. For example, if you have three cards with limits of $5,000 each (totaling $15,000) and close one, your total credit limit drops to $10,000. If your spending remains the same, your credit utilization ratio increases, which can lower your credit score.
Effect on Credit History Length
Closing an older card can shorten your overall credit history, especially if itās one of your longest-held accounts. While closed accounts stay on your credit report for up to 10 years, eventually they will drop off, potentially reducing the average age of your accounts.
Influencing Future Credit Approvals
With less available credit and potentially lower credit scores, you might have more difficulty getting approved for new credit lines or loans in the future.
When Should You Consider Closing an Unused Credit Card?
Despite the benefits of keeping unused credit cards, there are situations when closing them might be the better option.
- The card has high annual fees that outweigh its benefits. If youāre paying $95 or more per year for a card that you donāt use or get value from, it might make sense to cancel.
- Youāre worried about fraud and canāt monitor it regularly. If you donāt feel comfortable checking the card for unauthorized charges, closing it may reduce risk.
- Your card issuer is closing the account due to inactivity. Instead of having the bank close it, you might want to do so yourself and be prepared for the impact.
- Youāre trying to simplify your finances. Too many cards can be confusing, and reducing the number can help with budgeting and tracking expenses.
How to Manage an Unused Credit Card Wisely
If you decide to keep an unused credit card, there are smart steps to ensure it benefits your credit without causing problems.
Use It Occasionally
Make a small purchase every few months to keep the card active. This helps prevent some issuers from closing the card due to inactivity. A small recurring expense such as a subscription or a gas purchase works well.
Pay Off Balances Promptly
Even if you only make small charges, always pay off your balance in full each month to avoid interest charges and maintain a positive payment history.
Monitor for Fraud
Regularly check your credit card statements and set up account alerts for any unusual activity. Many issuers offer text or email notifications whenever your card is used.
Contact Your Issuer About Inactivity Policies
Some banks close cards after a certain period of not being used. Knowing this can help you decide if you should make a small purchase to keep the card open.
Other Related Considerations
What About Store Credit Cards or Secured Cards?
Store credit cards and secured credit cards often come with different terms, such as higher interest rates or fees. These cards may also have less impact on your credit score but can still add to your total available credit. Consider their specific features when deciding whether to keep or close them.
Will Closing a Credit Card Hurt Your Credit Score Immediately?
Closing a credit card wonāt instantly tank your credit score, but negative effects may show up within your next credit report update. Scores are updated regularly, and depending on your overall credit profile, the impact might be minor or more pronounced.
How to Check If a Credit Card Is Costing You Money
- Review your credit card statement for any fees like annual fees or inactivity fees.
- Look for terms related to maintenance or service charges.
- Compare the fees to the value you get from the card’s rewards or benefits.
Summary: Is It Bad to Keep a Credit Card You Don’t Use?
Keeping a credit card you donāt use isnāt inherently bad. In fact, it can positively impact your credit utilization ratio, length of credit history, and overall credit score. However, there are valid reasons to close or manage the card carefully, especially when fees or security concerns arise. Understanding your individual financial situation and goals will help you decide the best approach.
In short:
- Keep unused cards with no fees and monitor them regularly.
- Use the card occasionally to maintain account activity and benefits.
- Consider closing cards with high fees, security risks, or those you no longer find valuable.
- Evaluate how closing a card might affect your credit score, especially credit utilization and credit history length.
Your credit is a crucial part of your financial health, so making informed decisions about keeping or closing credit cards can pave the way for better lending opportunities and long-term financial success.
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Is it Bad to Keep a Credit Card You Don’t Use?
Many Americans wonder whether it’s smart to hold on to a credit card they rarely or never use. The idea of unused credit cards can be confusing ā should you cancel them to avoid fees and fraud, or keep them to help your credit score? The truth is, keeping a credit card you don’t use isn’t inherently bad. In fact, it can benefit your credit utilization ratio and lengthen your credit history, both of which positively impact your credit score. However, it’s important to stay vigilant for any annual fees, potential fraud, or changes in terms. By understanding the pros and cons, you can make an informed decision that aligns with your financial goals, keeping your credit health strong while potentially benefiting from rewards or protections linked to that account.
Conclusion
In conclusion, keeping a credit card you don’t use can be a smart financial move if managed responsibly. It helps maintain a lower credit utilization ratio and a longer credit history, which are essential factors for a healthy credit score. However, be mindful of any annual fees or changes in card terms that might make the unused card costly. Keeping the card active by making small purchases occasionally is a good way to prevent issuer closure or fraud alerts. Ultimately, the decision depends on your personal financial situation and goals. If the card has no fees and no downsides, keeping it can benefit your credit over time. But if itās costing you money or youāre concerned about security, closing it might be the better choice. Remember to monitor all your credit accounts regularly, use them responsibly, and choose products that support your financial well-being. This balanced approach helps you optimize your credit health and provides flexibility for future financial needs.
Frequently Asked Questions
Is it bad for my credit score to keep an unused credit card?
No, keeping an unused card can improve your credit score by increasing your available credit and lengthening your credit history.
Will my credit card issuer close my account if I donāt use it?
Yes, issuers may close inactive accounts after several months or years, which can impact your credit score.
Can keeping unused cards increase my risk of fraud?
Unused cards can be targets for fraud, so monitor your accounts regularly to detect any unauthorized activity early.
Should I keep my credit card if it has an annual fee and I donāt use it?
Itās usually best to cancel cards with fees if you donāt use them to avoid paying for no benefit.
Does closing an unused credit card hurt my credit utilization ratio?
Yes, closing a card reduces your total available credit, which can increase your utilization ratio and possibly lower your score.
How often should I use an unused credit card to keep it active?
Using the card for a small purchase every few months can keep it active and prevent closure.
Will keeping multiple unused cards negatively impact my credit score?
Not necessarily; having multiple cards can improve credit mix but be cautious not to overspend or miss payments.
Can rewards on an unused card expire if I donāt use the card?
Yes, some cards expire rewards if accounts are inactive, so check your cardās reward policy.
Is it better to pay off a balance or close a card I donāt use?
Paying off balances and keeping the card open is usually better for credit health than closing the account.
How does length of credit history affect my credit score?
A longer credit history generally improves your score; thus, keeping old cards open can be beneficial.
Can keeping an unused credit card help me get better loan rates?
Yes, a strong credit profile with high available credit can lead to lower interest rates on loans.
Are there risks to keeping many unused credit cards?
Risks include increased fraud potential and the temptation to overspend, so manage accounts carefully.
What should I do if my credit card issuer raises fees on an unused card?
Consider calling to request a retention offer or decide if canceling the card is better for your finances.
Does inactivity on a card affect my credit report?
Inactivity alone doesnāt harm your report, but it may lead to issuer closure, which can impact your credit.
How can I safely store my unused credit cards?
Keep them in a secure place, monitor statements regularly, and set alerts for suspicious activity.
