Keeping a card open is the best way to keep your credit from harm, unless it might lead you to overspend. Here’s what to do in that case.
Sometimes the person just got an exciting new rewards card and they are wondering if they should get rid of their old one.
Others have finally paid the balance on an old card and want to be done with it.
Some others might simply have outgrown that old secured credit card that helped them build good credit.
Whoever is asking, the answer is generally simple:
Don’t close it.
Why it’s wise to keep your old paid-off card open
There are exceptions to this, which I’ll get to in a bit, but for the most part, things really are that simple. The longer a card with a good credit history is open, the better it is for your credit.
That’s because credit scores are about predicting who is going to do a good job of paying back a loan, and if you’ve been able to maintain a good track record with a card for many, many years, it will lead the credit scoring formulas to view you as a less risky borrower.
Less risky borrowers have higher credit scores. Folks with high credit scores get better interest rates, cooler rewards – all the good stuff.
Options to keep an open card risk-free
If you don’t want to use the card anymore but don’t want to cancel it, stick it in a drawer somewhere. Freeze it in a block of ice. Cut it up so you can’t use it. Just don’t close the account.
Another option? Keep the card open and put a small recurring charge on the card each month. Put your Netflix or Spotify Premium bill on the card, and then set up automatic payments through your bank to make sure the charges get paid without you having to sweat it.
When it makes sense to close a credit card
Still, it’s not always a cut-and-dried choice. Here are two times when it might make sense to cancel that card.
1. The credit card has an annual fee
If you know that you won’t use the card much anymore and the card has an annual fee, it can make sense to cancel it.
It’s just not worth paying $89 a year for a card that you don’t use. Simple as that.
But won’t that hurt my credit? you may ask.
It doesn’t have to.
Video: What is your credit utilization ratio?
The primary impact to your credit would be to your utilization rate – how much debt you have compared to your available credit. (Credit utilization is the second most important factor in credit scoring, after making on-time payments.)
If you have $10,000 in available credit and $2,000 in debt, your rate is 20 percent, a good number.
Cut that available credit in half and suddenly your rate is an unacceptably high 40 percent. ($2,000 in debt versus $5,000 of credit). That can be a problem as credit scoring formulas like to see credit utilization ratios below 30 percent – the lower, the better.
Remedy that issue by asking your other credit card issuer for a higher credit limit.
An April 2018 CreditCards.com survey showed that 85 percent of people who ask for a higher limit get one, so your chances of success are far higher than you imagine.
Just make sure you don’t see that higher limit as an excuse to spend. Otherwise, you’re asking for trouble.
2. You don’t trust yourself to not spend
Picking the right card is about knowing yourself and your own spending tendencies. If you know that you won’t be able to resist using all that extra available credit for a shopping spree, cancel the account.
It’s far better to have your credit take a bit of a hit, than to find yourself racking up a bunch of extra debt on a card that you don’t really need.
When in doubt, don’t close it
People get intimidated by credit. They get all hung up on its complexities and nuances and overthink things. Don’t let that happen to you.
If you’re paying an annual fee on the card or you simply don’t trust yourself with it anymore, go ahead and cancel it.
Beyond that, if you just can’t decide whether that card should stay or go, keep it. The next time you check your credit score, chances are you’ll be glad you did.
See related: 4 things no one tells you about your credit score – but should, Credit card fees you can (and can’t) negotiate with your issuer