2 reasons not to cancel your old credit cards

Don’t close your cards until you read this.

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Key points

• If you have an old credit card that you don’t use, you might be tempted to cancel it.
• It’s generally a bad idea to close old accounts.
• Potential damage to your credit is just one reason to keep your old card open.

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If you have a credit card account and you stop using the card, then you will have to make a choice.

You will have to decide if you want to keep the old account open even if you no longer regularly load anything on the card – or if it is better to close the account.

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

1. Canceling old credit cards could hurt your credit score

The main 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 rate), types of credit, new credit you apply for, and average credit age. Three of these factors are affected when you close your old credit card accounts.

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

The credit line on the card will also disappear, meaning the percentage of credit used versus available credit will also be impacted. Say you have 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 charged $1,000 on. You use $1,000 out of $4,000 of available credit, so your utilization rate is 25%. That’s below the 30% utilization rate 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 is used. This will damage your credit score.

For all these reasons, it is best to keep the 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’ll need to borrow money. Ideally, you want to to charge purchases to your credit cards that you cannot refund. But sometimes things happen and you have no choice but to borrow.

In these situations, it can be advantageous to have credit available on your cards so that you do not have to try to open a new account in times of financial difficulty, and so you are not forced to switch to types of more expensive loans. like payday loans.

If you keep your old account open, you can avoid damaging your credit and can make sure you have access to an open line of credit in case the worst happens. There’s no reason to give up both of these benefits in most situations, especially if there’s no downside to not just closing your old account.