If you have a credit account you don’t use, you may have thought about closing it. After all, that would be one less card you have to worry about accruing annual fees, falling into the wrong hands or overusing it. While you may think of various good reasons to close the account, there is one very good reason you shouldn’t: your credit score.
Why You Should Leave Unused Accounts Open
Credit bureaus use five main factors when calculating your credit score. Those are, in order of importance, payment history, credit utilization, length of credit history, recent credit activity and credit mix. While your unused credit accounts affect each of these factors to some degree, it directly impacts two of the top three: credit utilization and length of credit history.
Accounting for 30% of your credit score, credit utilization refers to your debt-to-credit ratio. Ideally, your credit utilization rate should be 30%, though the lower, the better. When you carry a card that has zero balance, it only positively contributes to your credit score. Canceling the account reduces your available balance and increases your debt-to-credit ratio, thereby resulting in a hit to your credit score.
Length of credit history accounts for 15% of your credit score. Your older accounts carry the most weight. If you were to eliminate your oldest account, you may unwittingly eliminate one of your more positive credit influencers. This is especially true if you have a strong payment history on said account.
How To Keep an Account Open
Bear in mind that if a credit card or account goes unused for an extended period of time, the lender has the right to cancel it. Credit card issuers only make money if consumers use the extended lines of credit. They also only have so much credit they’re allowed to issue. If you don’t use your account for several months, the lender can’t make money off you, in which case it may decide to reallocate your credit to someone who will use it. To prevent this from happening, use your card periodically for small purchases. Just be sure to pay off the balance right away.
When To Close Unused Accounts
There are a few instances in which closing an unused account may have little to no impact on your credit score. If the account is newer, closing it may not hurt your score very much, if at all. If a card has a low credit limit and you don’t have much debt, you may not see much of an impact. Finally, if you transfer the balance from a newer account to an older one, you may even see a boost in your score.
Ideally, you should keep your accounts open. However, if one creates too much temptation and if closing it would have little to no impact on your score, saying goodbye to it will not be the end of the world.
