Question: I have several credit cards that I've had for a long time. I recently got out of debt and I'm no longer using credit cards. I've cut up the cards so I'm not tempted to use them. Should I close these credit card accounts or keep them open? - Ellen
Answer: Hi Ellen,
I'm glad you're asking this question because there are a few things to consider. But first, I want to applaud you for having the courage to make a decision that keeps you out of debt.
If you're able to have the cards present in your home and not use them, then it's usually best to keep the accounts active. Even if you seldom use the credit cards, protecting your credit score pays off. A healthy credit score helps you save money in many areas of your financial life. Here are just a few examples: health insurance, mortgage rates, rental deposits, personal loans in case of emergency, life insurance, car insurance, and more.
The biggest impact of closing credit card accounts has to do with your credit utilization ratio, so let's take a look at that.
Your Credit Utilization Ratio
This is the amount of credit you've used compared to the amount of credit you have available. When you close credit card accounts, you lose the available credit and this causes your ratio to go up.
For example, if you have a card with a $1,000 limit and you've spent $300 with the card, then your ratio is 30 percent (300/1,000 = .30). Your ratio should be under 30 percent, but under 10 percent is even better. If you use your credit cards sparingly, you'll have very low ratios and this is good for your score.
Your Credit History
This is impacted to a lesser extent, at least in the present. Fortunately, closed credit accounts could stay on your report for up to 10 years, so this won't be an immediate hit to your score. But assuming your accounts are in good standing, using your cards occasionally keeps your history intact.
In order to keep issuers from closing cards on their own, however, you'll want to use the cards a few times a year for small purchases. Ideally, use them once a month, but only if this doesn't tempt you to overspend. Six months of inactivity could cause a credit card company to decide to cancel your credit card.
Good Reasons to Close Credit Card Accounts
In spite of the impact to your score, there are situations where you might be better off closing the accounts. If you've got a high annual fee on a credit card that you no longer care to use, then that's an acceptable reason.
But the best reason to close credit card accounts? If having them nearby is tempting you to spend and get back into debt. You've cut up your cards to remove temptation and that's a great strategy. But are you still tempted to piece the cards back together so you can see the account numbers and purchase items on a website? If so, then it might be a good idea to close the accounts.
But don't close multiple cards all at once because that could be a really big hit to your score. Spread it out so you don't get a big hit at one time.
The bottom line? It's more important to protect yourself from debt than it is to have a high credit score. If you do get into serious debt, your credit score will eventually drop anyway as your credit utilization ratio starts to rise. So do what you need to do to protect yourself. Pay all your bills and be responsible with your money.
If you do need to boost your score at some point, there are credit-building loans that are available. Also, if you have a mortgage or a car payment, paying these on time also helps you maintain a good score. You can monitor your free credit score right here at LendingTree.