If you want to simplify your finances and you have a credit card that you rarely use, you might think it would make sense to close the account. Before you make that move, consider possible unintended consequences.
Closing a Credit Card Account Can Hurt Your Credit Scores
Several factors influence your credit scores. One of those factors is your credit utilization ratio. That is the sum of the balances on all your credit cards, divided by the sum of the credit limits on all those cards and converted to a percentage.
A credit utilization ratio below 30% demonstrates that you can handle credit responsibly. That can have a favorable impact on your credit scores.
If you close a credit card account, its credit limit will no longer be used to calculate your credit utilization ratio. Your outstanding balances will remain the same, but your total available credit will be lower. That will cause your credit utilization ratio to rise, which might make your credit scores fall.
The average age of all your accounts is another factor that influences your credit scores. A long history of managing credit responsibly can translate to strong credit scores. Closing a credit card account that you’ve had for years can lower the average age of your accounts and potentially cause a drop in your credit scores.
Getting Rid of a Credit Card Can Make It Hard to Get Other Forms of Credit
A drop in your credit scores can create a roadblock if you want to get a mortgage or an auto loan. Even a small dip in your scores can lead to a higher interest rate on a loan or make you unable to get approved at all.
You Might Need to Use the Credit Card in the Future
Even if you don’t use a credit card and you don’t plan to, it can be wise to keep the account open, just in case. At any time, you might face an unexpected bill for medical treatment or car repairs, or you might lose your job. If that happens, you might have to use a credit card to cover expenses.
Use Your Card Occasionally to Keep the Account Active
If you don’t use a credit card for a long time, the issuer might close the account due to inactivity. If that happens, your credit scores can take a hit. To avoid that, use the card to make small purchases from time to time or to cover a recurring monthly expense.
