Cancel Credit Card Or Keep Open What's Best?
Hey guys! Ever wondered about the best way to handle those credit cards you no longer use? Should you cancel them, or is it better to just leave them open and tucked away? It's a question that pops up for many of us, and the answer isn't always straightforward. Let’s dive into the pros and cons of each approach so you can make the smartest decision for your financial health.
The Dilemma: Cancel or Keep Open?
When you’re thinking about managing your credit cards, the big question boils down to this: is it wiser to cancel a card you’re not using, or should you just keep it open but stashed away? On the surface, it might seem like canceling is the obvious choice – less clutter, right? But hold on a second! There are some serious factors to consider before you pick up the phone or log into your account to cancel. The truth is, the choice can significantly impact your credit score, spending habits, and overall financial well-being.
Credit Score Impact
Your credit score is a crucial piece of your financial puzzle. It affects everything from loan rates to apartment applications. One major factor that influences your credit score is your credit utilization ratio – that's the amount of credit you're using compared to your total available credit. Closing a credit card reduces your overall available credit, which can bump up your credit utilization ratio if you're carrying balances on other cards. Ideally, you want to keep your credit utilization below 30% to maintain a healthy credit score. For example, if you have two cards with a $5,000 limit each (totaling $10,000) and you're carrying a $2,000 balance, your utilization is 20%. Close one card, and your available credit drops to $5,000. That same $2,000 balance now represents a 40% utilization, which could ding your credit score.
Another factor is the length of your credit history. Older credit accounts demonstrate a longer track record of responsible credit use, which is a plus for your credit score. Canceling an older card can shorten your credit history, potentially lowering your score. This is especially true if the card you’re considering canceling is one of your oldest accounts. Credit scoring models like FICO consider the age of your credit accounts, so keeping those oldies but goodies can be beneficial. Think of it like a fine wine – the longer the history, the better (for your credit score, anyway!).
Spending Habits and Temptation
Let’s get real – sometimes having too much available credit can be a slippery slope. It might tempt you to spend more than you can afford, especially if you're the type who gets lured in by sales and promotions. Keeping a card open with a high credit limit can feel like having a safety net, but it can also encourage overspending. If you've got a card with a $10,000 limit sitting in your drawer, it’s easy to justify that new gadget or weekend getaway, even if it's not in your budget.
On the flip side, if you’re disciplined with your spending and can resist the allure of excess credit, keeping a card open might not be an issue. It really comes down to your personal spending habits and your ability to stick to a budget. Be honest with yourself – are you the type who can handle having extra credit available, or are you prone to impulse purchases? Your answer to this question can help guide your decision on whether to cancel or keep open.
The Case for Canceling a Credit Card
Okay, so when does it make sense to cancel a credit card? There are definitely situations where it’s the smarter move. Let's break down some compelling reasons to hit that cancel button.
High Annual Fees
Annual fees can be a real drag, especially if you're not using the card enough to justify the cost. Some cards come with hefty annual fees that can range from $50 to hundreds of dollars. If you're paying an annual fee for a card you rarely use, you're essentially throwing money away. It’s like paying for a gym membership you never use – a waste of good money! In this case, canceling the card might be the most financially sound decision. Before you cancel, though, it's worth calling your card issuer to see if they'll waive the fee or offer a product change to a card with no annual fee. Sometimes, a simple phone call can save you some serious cash.
Temptation to Overspend
We touched on this earlier, but it's worth revisiting. If you know you're prone to overspending and that extra credit card is just sitting there whispering temptations, canceling it can be a form of self-discipline. It's like removing the candy jar from your desk if you're trying to eat healthier. Sometimes, the best way to avoid temptation is to eliminate it altogether. Canceling a card can help you stick to your budget and avoid racking up debt. It’s a proactive step towards better financial habits and peace of mind.
Simplifying Finances
Sometimes, less is more. If you have a wallet overflowing with credit cards, it can be overwhelming to keep track of them all. Multiple cards mean multiple bills, multiple due dates, and multiple interest rates to worry about. Canceling a card or two can simplify your financial life and make it easier to manage your money. It's like decluttering your closet – sometimes you just need to get rid of the excess stuff to feel more organized. A simpler financial life can lead to less stress and more financial clarity.
The Case for Keeping a Credit Card Open
Now, let's flip the script and look at why you might want to keep a credit card open, even if you're not actively using it. There are some valid reasons why stashing that card away in a drawer might be the better option.
Maintaining Credit Utilization
As we discussed earlier, your credit utilization ratio is a big deal. Keeping a card open, even if you're not using it, increases your total available credit. This can help lower your credit utilization ratio, which is good for your credit score. Think of it like having a bigger bucket to hold the same amount of water – the water (your credit balance) takes up less of the bucket (your available credit). The lower your utilization, the better your credit score looks. Keeping those cards open is like giving your credit score a little boost.
Building a Stronger Credit History
Your credit history is like your financial resume. The longer you've been using credit responsibly, the better it looks to lenders. Canceling an old credit card can shorten your credit history, which could negatively impact your credit score. Keeping those older cards open, especially if they're fee-free, helps you maintain a longer credit history. It shows you've been managing credit for a while, which is a sign of financial stability.
Emergency Funds and Unexpected Expenses
Life happens, and sometimes unexpected expenses pop up. Having an unused credit card available can serve as an emergency fund. It's like having a safety net in case you need to cover unexpected medical bills, car repairs, or other emergencies. While it's not a substitute for a proper emergency fund (which you should definitely have!), an unused credit card can provide some peace of mind. Just remember, if you do use it, make sure you can pay it off promptly to avoid interest charges.
How to Decide: Questions to Ask Yourself
Okay, so we’ve covered the pros and cons of both canceling and keeping a credit card open. Now, how do you actually make the decision? Here are some key questions to ask yourself:
Does the card have an annual fee?
If the card has a high annual fee that you're not offsetting with rewards or benefits, canceling it might be the best move. There’s no point in paying for something you're not using. Call your issuer first to see if they can waive the fee or switch you to a no-fee card.
How long have you had the card?
If it's one of your oldest credit accounts, keeping it open can help your credit history. Older accounts demonstrate a longer track record of responsible credit use.
What's your credit utilization ratio?
Calculate your credit utilization ratio and consider how canceling the card will affect it. If it will significantly increase your utilization, keeping the card open might be the better option.
Are you prone to overspending?
Be honest with yourself about your spending habits. If having extra credit available tempts you to overspend, canceling the card can help you stick to your budget.
How many other credit cards do you have?
If you have multiple cards, canceling one might simplify your finances. However, make sure you're not canceling too many cards, as this could negatively impact your credit utilization and credit history.
Steps to Take Before Canceling
Before you hit that cancel button, there are a few steps you should take to ensure you're making the right decision and to minimize any potential negative impact.
Check Your Credit Report
Review your credit report to see how canceling the card might affect your credit score. Look at your credit utilization ratio and the age of the account. You can get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) annually at AnnualCreditReport.com.
Redeem Rewards
Make sure you've redeemed any rewards points or cash back before you cancel the card. Once the account is closed, you'll likely lose those rewards. It’s like leaving free money on the table if you don’t redeem them first!
Contact Your Card Issuer
Call your card issuer to discuss your options. They might be willing to waive the annual fee, offer a product change, or provide other incentives to keep you as a customer. It never hurts to ask!
The Bottom Line
So, what’s the verdict? Should you cancel that unused credit card or keep it open? The answer, as you probably guessed, is: it depends. It depends on your individual circumstances, your spending habits, your credit score goals, and your overall financial situation. By carefully considering the factors we've discussed and asking yourself the right questions, you can make the best decision for your financial future. Remember, there’s no one-size-fits-all answer, so take the time to weigh your options and choose wisely!
Whether you decide to cancel or keep open, the key is to be proactive and informed about your credit cards. Keep an eye on your credit score, manage your spending responsibly, and stay on top of your financial goals. You’ve got this!
