You've likely accumulated several credit cards over the years – that department store card from your college days, the airline card you got for a specific trip, or that old bank card you rarely use anymore. Your instinct might be to close these unused accounts to simplify your financial life. But before you make that call, it's worth understanding why keeping credit cards open – even ones you rarely use – can significantly benefit your financial health.
Credit cards aren't just payment tools; they're active components of your credit profile that influence how lenders view your financial responsibility. While it might seem counterintuitive to keep unused financial products around, those dormant cards could be silently supporting your credit score in several important ways.
Impact on Credit Utilization Ratio
Perhaps the most significant benefit of keeping unused credit cards open is their positive effect on your credit utilization ratio – one of the most influential factors in your credit score calculation.
What is Credit Utilization?
Credit utilization represents the percentage of your available credit that you're currently using. For example, if you have $10,000 in total credit limits across all your cards and currently have $2,000 in balances, your utilization ratio is 20%.
Credit Utilization Ratio = (Total Credit Card Balances / Total Credit Limits) × 100
Lower ratios (generally below 30%) are better for your credit score, with the ideal utilization being under 10%.
How Keeping Cards Open Helps
When you keep an unused credit card open, you maintain access to that credit line without actually using it. This has a powerful mathematical effect on your utilization ratio:
| Scenario | Total Credit Limits | Total Balances | Utilization Ratio |
|---|---|---|---|
| With all cards open | $20,000 | $3,000 | 15% |
| After closing unused card with $8,000 limit | $12,000 | $3,000 | 25% |
As shown above, simply closing an unused card can dramatically increase your utilization ratio, potentially lowering your credit score – even though your spending habits haven't changed at all.
Effect on Credit History Length
The length of your credit history accounts for approximately 15% of your FICO credit score calculation. This includes factors such as:
- Age of your oldest account
- Average age of all your accounts
- How long specific accounts have been open
How Closed Accounts Affect History Length
When you close a credit card account, it doesn't immediately disappear from your credit report. Depending on the credit bureau, closed accounts in good standing typically remain on your credit report for up to 10 years.
However, once a closed account does fall off your report, it can significantly impact your credit history length – especially if it was one of your oldest accounts.
Your oldest credit card is especially valuable to your credit history. If you have a card that you've maintained for many years, keeping it open can provide significant benefits to your credit score's "length of credit history" component.
Real Impact Example
Consider this scenario: You have three credit cards opened 12 years ago, 5 years ago, and 1 year ago. Your average credit history length is currently 6 years.
If you close your oldest card (the 12-year-old account), your average would immediately drop to just 3 years once that account eventually falls off your report – cutting your credit history length in half!
Benefits to Total Available Credit
Beyond utilization ratio and credit history, maintaining open credit cards contributes to your total available credit – an important indicator of financial stability and trustworthiness to potential lenders.
Lender Perception
When other financial institutions see that various lenders have extended substantial credit limits to you, it serves as an implicit endorsement of your creditworthiness. This can make obtaining new credit – whether for a mortgage, auto loan, or new credit card – easier and potentially available at better rates.
Credit Mix Benefits
Your "credit mix" – the variety of credit accounts you maintain – contributes about 10% to your FICO score. Having multiple credit cards (along with other types of accounts like installment loans) demonstrates your ability to manage different types of credit responsibly.
Emergency Access and Security Benefits
Financial preparedness extends beyond just maintaining good credit scores. Keeping credit cards open provides practical financial security benefits:
Emergency Financial Access
An unused credit card represents immediate access to funds in case of emergency. While building an emergency savings fund should be your primary financial safety net, having available credit provides an additional layer of security for unexpected situations.
Backup Payment Method
We've all experienced the frustration of a declined primary card while traveling or making an important purchase. Keeping multiple cards active ensures you always have backup payment options available.
Consider keeping at least one low-utilization credit card from a different network (Visa, Mastercard, Amex, Discover) than your primary card. This provides protection against network outages or merchant acceptance limitations.
Potential Downsides to Consider
While the benefits of keeping credit cards open are substantial, there are legitimate reasons to consider closing some accounts:
Annual Fees
If a rarely-used card charges an annual fee, the credit score benefits might not justify the ongoing cost. Consider requesting a product change to a no-annual-fee version of the card instead of closing it entirely.
Temptation to Overspend
For some individuals, available credit represents a temptation to spend beyond their means. If having open credit limits leads to problematic spending habits, the financial benefits of closing the account might outweigh the credit score considerations.
Account Management Burden
Each additional credit card requires some degree of monitoring for potential fraud, reviewing statements, and ensuring no unexpected fees. If managing multiple accounts becomes overwhelming, consolidation might be appropriate.
If you're planning to apply for a significant loan (like a mortgage) in the near future, consult with your loan officer before closing any credit accounts. The temporary impact to your credit score could affect your loan terms.
Preventing Automatic Closure
Credit card issuers often close inactive accounts after extended periods without use – typically 6 to 24 months, depending on the issuer. When an issuer closes your card for inactivity, you lose all the benefits of keeping that account open.
Simple Ways to Keep Cards Active
- Set up small recurring charges like streaming services or utility bills
- Make occasional small purchases and pay them off immediately
- Use automatic subscription services that place regular charges
- Add the card to a digital wallet for occasional use
Keep Your Card Active Without the Hassle
KeepCreditCardOpen provides a simple solution to prevent your unused credit cards from being closed due to inactivity. Our service places small, regular charges on your card – keeping it active without requiring you to remember to use it.
Subscribe now!Conclusion
While closing unused credit cards might seem like a way to simplify your financial life, the benefits of keeping them open often outweigh the disadvantages – especially for cards with no annual fee and a long history.
The positive impact on your credit utilization ratio, credit history length, and overall financial security makes maintaining these accounts a smart financial strategy for most consumers. By understanding these benefits and taking simple steps to keep your accounts active, you can maximize the positive impact of your credit card portfolio on your overall financial health.
If managing regular activity on multiple cards becomes burdensome, consider solutions like KeepCreditCardOpen to automate the process of keeping your cards active through minimal, regular charges.