What should you do if you have unused credit cards in your wallet? Should you cancel them or keep your accounts open? What happens if you choose not to cancel them, but continue not to use them? While there are pros and cons about closing accounts or keeping these open and differing opinions regarding this topic, in most cases your best option is to keep the cards active and use them periodically.
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If you must close some accounts, there are several recommendations for when to close them and which accounts to close to lessen any potential effect on your credit history. It is important to keep in mind, while you think you may be something positive, it could result in negative consequences if not done correctly.
What happens when you cancel unused credit cards?
When you close credit card accounts that you are not using, you will see a negative impact on your credit rating, which is due to two main factors. First, any positive payment history associated with this credit card is wiped out. Additionally, your credit utilization rate will be affected which will result in a lower credit score.
MSN Money, describes this rate as the amount of credit you have in total compared to the amount you have available. If you close out a card with a zero balance and $5,000 of credit, you have just reduced your amount of available credit by $5,000. When your credit score is reviewed lenders typically like to 35% or less of your available credit used up at any given time.
Is there ever a positive side to cancelling unused credit cards?
There can be some pros to cancelling unused credit cards says Mint.com. If you have several credit cards in your possession, by reducing the number of active accounts you also reduce the chance you will have one of these accounts stolen or used in a fraudulent manner.
In addition, if you have difficulty controlling your spending, you lessen the chances of using your credit cards to spend beyond your financial limits by getting rid of some of your cards. If you do plan to cancel your unused credit cards, here are some tips you should consider:
- Do not cancel all of your unused cards at one time. Instead, spread out your account closures.
- Try to close lower limit, higher interest cards and keep higher limit cards open. This will affect your credit score less. Retail cards are typically a good place to start.
- Do not close a credit card account just before you plan to apply for a loan and will need your credit rating to be at its strongest.
Some say that you should keep your oldest accounts open to preserve the age of your credit history. Mint.com says that this is not true anymore. Credit card companies now base the age of your credit history on the average age of all of your open and closed accounts.
Will the banks take any action if you keep your unused credit cards open?
Some banks may choose to close unused credit card accounts after a significant period of inactivity. Reducing credit limits is another action they may take. Whether you initiate the account closure or the bank does, it will still hurt your credit rating. Other times banks will charge credit card inactivity fees.
It is important to check your credit card statements even when you have not used your card as these fees can appear at any time although typically not until there has been no activity on the card for several months. The reason for doing this is that banks do not make any money off credit card accounts that are never used.
What is your best option with your unused credit cards?
To conclude, your best option is to keep most of your unused credit card accounts open. If you have a very large number of credit cards you may consider closing a few accounts that have low credit limits, but it will negatively affect your credit rating. To prevent inactivity fees or closure of accounts by your bank, it is advisable to use all of your credit cards periodically and pay off credit card balances each month. You might consider paying one of your utility bills each month with a typically unused credit card and then just send your payment to the credit card company instead of the utility.
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