Did you know that closing credit cards— even ones that are rarely used—can actually lower your credit score?
Why would that be? Your “credit-utilization ratio”— the percentage of your available credit that you currently are using—is a significant component of your credit score, and lower is better. When you close a card, your available credit declines…which means that the percentage of your available credit you’re currently using climbs—and that can cost you points on your credit score.
Credit scores are not the only factor lenders consider. Occasionally a lender might decide not to extend additional credit to a borrower because he/she already has lots of credit cards…but lenders rarely consider this a major problem.
On balance, not closing unused credit cards is the smart move—or, better yet, make purchases with otherwise unused cards every few months to dissuade their issuers from canceling them.
Exceptions: Consider closing an unused card if it has a high annual fee and a low credit limit— that low limit means it probably isn’t helping your credit-utilization ratio enough to justify its cost. And strongly consider canceling any joint credit cards you have with your spouse if the relationship appears headed toward divorce.
