Credit Cards

2 reasons not to cancel your old credit cards

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Do not close your cards until you have read this.

Key points

  • If you have an old credit card that you’re not using, you may be tempted to cancel it.
  • It’s usually a bad idea to close old accounts.
  • Potential damage to your credit is just one reason to keep your old card open.

If you have a credit card account and stop using it, you will have a decision to make.

You’ll need to decide if you want to keep the old account open, even if you no longer load anything on the card regularly, or if it’s better to close the account.

In general, it’s usually a bad idea to close old credit card accounts. And there are two main reasons why that is the case. This is what they are.

1. Canceling old credit cards could hurt your credit score

The biggest reason to keep old credit card accounts open is that closing them will usually cause your credit score to drop.

Your credit score is based on a few main factors, including payment history, the percentage of available credit you’ve used (called the credit utilization ratio), types of credit, new credit you’re applying for, and average credit age . Three of these factors are negatively affected when you close your old credit card accounts.

Closing the account will eventually cause your payment history to be removed from your report, which means you will lose the benefit of your on-time payment record, assuming you paid the card responsibly. When the card is removed from your credit report, your average credit age will also be shorter, due to the fact that you no longer have that old account on your record.

The credit line on the card will also disappear, which means that the percentage of used credit against available credit will also be affected. Let’s say you had two cards: the old one with a balance of $2,000 that you no longer use, and a new one with a balance of $2,000 that you’ve charged $1,000 to. You are using $1,000 of $4,000 in available credit, so your utilization rate is 25%. That’s below the 30% utilization ratio needed to avoid hurting your credit score.

If you close the old account and lose the $2,000 line of credit, your new utilization rate will be 50%: $1,000 of your $2,000 limit will be used. This will hurt your credit score.

For all of these reasons, it’s best to keep your old account open even if you no longer use the card.

2. You will lose access to credit you may need

Another big problem is that you never know when you will need to borrow money. Ideally, you don’t want to charge your credit cards for purchases that you can’t pay for. But sometimes things happen and you have no choice but to borrow.

In these situations, it can be beneficial to have credit available on your cards so you don’t have to try to open a new account in times of financial trouble and so you don’t have to switch to even more expensive types of loans. such as payday loans.

By keeping your old account open, you can avoid damaging your credit and can ensure you have access to an open line of credit in case the worst happens. There is little reason to give up these two benefits in most situations, especially if there is no downside to simply not closing your old account.

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