I Have a Credit Card I No Longer Use. Is It Bad to Close a Credit Card?

Dear TMY,

Yes, closing a credit card account you no longer use may have a negative effect on your credit scores. Credit utilization is an important factor in the calculation of credit scores, and closing an account can cause your credit utilization rate to increase - especially if you tend to carry balances on your other credit card accounts.
However, the decline is usually temporary, assuming nothing else negative occurs in your credit history.

What is Credit Utilization Rate?

Your credit utilization rate, also referred to as your balance-to-limit ratio, is expressed as a percentage. It is calculated by adding up the total of all your credit card balances and dividing them by the total of all your credit card limits.
The lower your credit utilization rate, the better for your credit scores. When you close an account, you no longer have that credit limit available to you, so your utilization percentage will likely increase.

Deciding Whether to Close an Account

There are other things to consider when making the decision whether or not to close an account:

• New Credit Applications: If you are planning to apply for credit in the next three to six months, it may be wise to keep the account open. It's usually best to keep your credit history stable until you've completed the credit transaction. But, you should also consider your overall financial situation. Don't just consider the credit score.
• Reducing Costs: While closing an account might cause your scores to drop, it still might be the right decision. If the account has an annual fee, it may not make good financial sense to continue paying for a card you no longer use. And, if you are trying to cut down on spending or are struggling to pay existing debts , closing the account will remove the temptation to make additional purchases. In that case, closing the account could help you prevent even worse financial problems.
• Maintaining Good Credit: After considering your overall financial situation, you may find that keeping the account open is the better decision. Charging just a small amount every month and paying it off right away will keep the account active without costing you any money in interest fees.

Everyone has a unique credit history. If you haven't already done so, consider ordering a current copy of your credit score before making any changes to accounts. With it, you will receive a list of the top risk factors that are currently affecting your score. Reviewing these factors can help you make educated decisions about all of your credit accounts.

Thanks for asking,
Jennifer White, Consumer Education Specialist