Closing unused credit card accounts may sound like a good idea, but it could hurt your credit score because of increased utilization and, eventually, shorter credit history.
That said, if you want to close accounts, you should aim to close cards that won't hurt your score significantly or those that cost you fees to maintain.
How closing a credit card account affects your credit score
Many people worry that closing an account will lower their length of credit history, but closed accounts with positive information can stay on your report for up to 10 years. The real issue with closing an account is the increase in your credit utilization ratio — that is, your debt balance(s) in relation to your credit limit(s).
This problem doesn't just affect people who carry debt from month to month — anyone who uses credit cards could have high utilization, even if they pay off their balances in full each month.
Learn more: Best credit cards of 2023
That's because balances are often reported to the credit bureaus mid-billing cycle. So if you have a $5,000 limit and you charge $3,000 in a month, you could be reportedly utilizing 60% of your available credit. That's above the recommended 30% or less, and it could drag your score down.
But if you have a large amount of credit available, your utilization decreases. For example, let's say you still have that $3,000 balance, but you have a second card with a $7,000 limit and no balance. You now have an overall utilization of 25%.
Understand that if you keep a card open but don't use it, your issuer may close it because of inactivity. The time period for this varies greatly, but it's a good idea to set up an automatic bill pay for a small monthly expense — like your monthly gym membership fee or Netflix subscription — to keep the account active.
Credit accounts you may consider closing
If you're going to close a credit card, aim to close an account that fits one or more of these criteria: A card with an annual fee that you don't use, a newer card without an annual fee that you don't use, or a card with unfavorable terms.
Here's why:
The card you don't use with an annual fee: Annual fees have their place in the credit card industry, provided you spend enough to outweigh the annual fee and come out ahead on rewards. However, a card with an annual fee that you aren't using is needlessly costing you money.
Before you close this account, try asking your issuer to waive your annual fee or downgrade your card to a no-fee version. This way, you'll keep the credit history and you won't increase your credit utilization ratio.
The newer card you don't use without an annual fee: When deciding which cards to cancel, get rid of new cards before old ones. New accounts actually lower your length of credit history, so the impact of canceling them will be minimal from that standpoint. That said, your utilization could increase upon cancellation.
Before you close this account, understand that it isn't costing you anything to maintain on a yearly basis. You may want to keep it around for the decreased utilization, especially if you carry credit card debt or charge large balances each month.
The card with unfavorable terms: If a card has high fees or a low limit, you may consider canceling it. For low limit cards, your utilization won't be harmed too much if you cancel. But keep in mind that it's better to close newer accounts, not accounts you've had since the beginning of your credit-building tenure.
Before you close this account, consider whether you're affected by the unfavorable terms. For instance, a high APR doesn't matter to the cardholder who diligently pays his balance in full each month. If the terms aren't hurting your credit or finances, it may be worth it to keep the card around.
The credit account you shouldn't cancel
Avoid canceling your oldest credit card account to keep its long history on your report for years to come. Most first cards don't have an annual fee, unless it's a secured card. In this case, you should call your issuer and ask to have it upgraded to an unsecured card without an annual fee.
Set up an automatic bill payment from this account to keep it open and active. It might not be the best card in your wallet, but it's your best tool for maintaining a lengthy credit history.
Bottom line
Canceling credit accounts isn't ideal from a credit utilization and length of credit history standpoint. That said, if you must, close accounts that won't significantly damage your credit or unused cards with high annual fees. And try to keep your oldest account open and active as long as possible.
MORE:Free isn't always better: A case for the credit card annual fee
MORE:3 reasons your credit card issuer could close your account
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