Earlier this year, my husband received an unusual letter from his credit card company. He had not used his card in two years, and the bank alerted him that he had two months to make a purchase on the card, or else it would be cancelled.
This particular card, which he’s carried for over 15 years, has gotten dusty because we share a Upromise reward credit card that we use for all of our spending. We pay that card off monthly, and have no other need for credit.
At first I thought there was no need to keep an unused card around. We didn’t need it, and it was just one more thing to keep track of. But when I looked into the consequences of losing such a long-term piece of my husband’s credit history, I realized that keeping the account open was the smart thing to do.
Here’s what you need to know about canceling your unused credit cards and how it can affect your credit score.
Balance-to-Limit Ratio
The largest impact on a credit score comes from this particular metric: the balance-to-limit ratio. Credit agencies look at the percentage of your credit limit that you utilize and this calculation determines about 30% of your overall credit score.
Since my husband and I only have two credit cards between us, allowing one of them to close could seriously hurt our total balance-to-limit ratio. Each card has a $10,000 limit, and we generally charge about $3,000 per month on our Upromise card, meaning our total utilization percentage is about 15%.
Even though we pay off our credit card each month, closing the older card would make his utilization jump to 30%, which could cause a dip in his credit score.
Length of Credit History
The biggest drawback to letting my husband’s credit card lapse is the loss of all of that credit history. He’s carried this card for nearly two decades, and it would be foolish to lose that length of credit history for no compelling reason.
According to Leslie McFadden of Bankrate.com, “Closure of the oldest account would affect the score more than shutting down a newer tradeline.” Length of credit history makes up 15% of the credit score, and shortening that history by closing his oldest account could be an unnecessary ding to his otherwise excellent score.
Payment History
Finally, letting the old credit card be closed would cost him the payment history associated with this account. Payment history makes up a whopping 35% of the credit score calculation.
While this particular hit to the credit score would not happen immediately, since closed accounts are not usually deleted right away, they will not stay on longer than 10 years. Worse, it could be a nasty secondary hit to his credit score when we are simply not expecting it.
The Bottom Line
Understanding how credit decisions affect your credit score is an important part of financial fitness. Before you let inertia make decisions for you, it’s a good idea to understand the consequences.
In our case, we decided to put a recurring charge on my husband’s card, which we will pay off monthly. That allows us to hold onto all the good work he has done without seriously inconveniencing ourselves.
Do you have a credit card you never use? How will does leaving it active versus closing it affect your credit history?
{ read the comments below or add one }
I got a similar letter for a credit card I have never used. Probably 2 -3 years old that I do not know where it is so I will need to just let it go. I have 3 CCs that have large credit limits (over $12,000) along with a couple of others with lower limits but the credit I use each month is generally under $3,000 for all my CCs and paid off each month. After having issue with late payments I now have a good – excellent credit rating. For me allowing the missing credit card to come off does not appear to be an issue as my credit usage is a low % and I do not need the extra credit.
If you decide to keep it but you know you’ll never use it, take it out of your wallet or purse and stash it away. If you never use a card and it ends up getting lost or stolen, it could take a much longer period of time before you notice the problem, so it’s best to remove that possibility as much as possible.
I had no idea not using a credit card had such consequences! I will definitely look through my wallet now so I can tell which ones I use and which I not (a spring cleaning?). Thanks for sharing!
We don’t have any credit cards and don’t borrow money, so we don’t give a rip what our credit score is. My question for the author is, if you only use one credit card and pay it off every month, why do you care about your credit score that much? The only good reason to keep a score high is if you plan on borrowing a lot of money in the future.
Hi Cyrus–that’s a great question. There are a couple of potential reasons for keeping a good score, including the possibility of buying a rental property down the road, or if my husband decides to go for the Master’s degree he’s been considering.
Overall, you are right that we don’t really need a high credit score, but I think of it like insurance. It’s a good idea to have that ace in the hole, particularly when it does not seriously hurt or inconvenience us to maintain it.
Both the things you mentioned, buying rental property and getting a masters degree, can both be done without going deeply into debt. Financing investment real estate and higher education is NOT financially wise, so I don’t know why you would borrow money to keep a credit score high just so you have the opportunity to go deeper into debt later.
Also, using debt as “insurance,” as you mention, is also not financially wise. An emergency is presisely the worst time to go into debt. Having cash, in the form of a large emergency fund, is the best insurance policy.
While it may not inconvenience or hurt you personally to keep credit cards around for the purposes of maintaining a credit score, the majority of people who own credit cards don’t have the discipline to avoid carrying a balance, and/or they waste a lot of time and money by obsessing over card “rewards” and overspending to get those “rewards.”
Cyrus, it’s true that many people are not able to handle credit. However, for those who are, it’s a good idea to understand exactly how the credit score is calculated. I see credit as a tool, and one that I want my readers to understand how to use as intelligently and responsibly as possible–in the same way that I want people to know how to drive a car intelligently and responsibly, because an inexperienced and uneducated driver behind the wheel is a hazard to himself and others. The tool is not the issue, the user is.
As for the insurance–my assumption when I refer to credit cards as a potential type of insurance is that the user does have a robust emergency fund, large portions of which are invested in order to get the most out of the money. Individuals in that situation might not be able to access a large amount of money instantaneously in case of an emergency, but could certainly put it on the card and then pay the card back from their emergency fund.
As for the wisdom of financing investment real estate and higher education, I would say that wisdom is subjective and I am afraid I disagree with you.
I have appreciated your thoughtful comments. I think it’s time to agree to disagree.
When I have cards with an annual fee that is waived the first year or when I don’t want to pay the annual fee after the first year, I’ll look for options to downgrade the card to a card that doesn’t have an annual fee. That way I keep the available credit and continuous credit history.
Exactly, this is what I constantly talk to my clients about. You have to educate yourself on all aspects of your credit in order to benefit from wise decision making. Too many time consumers assume that the long-worded disclosures are just information to protect the company and no big deal. Take the time to read everything your benefit from it greatly. Lots of good information here; nice job.
I have cc with c line 700 but annual fee $250 and just 2yrs old but now I have 10cc no fee I want to close because fee
Great advice. It can sometimes be easy to forget which cards have annual fees if you have a lot of them and have the option to pay them upfront, so another thing worth looking at is whether you value the positive impact the card is having on your credit score (due to average age of accounts) over paying the annual fee. If you’re not getting any benefit out of the card but you’re still paying the annual fee to keep it open, it may be best to just take the credit score hit and close it. Otherwise you’re essentially paying a fee just for keeping your credit score a little higher.