Should You Keep Unused Credit Cards?

Credit cards are a powerful financial tool, offering convenience, rewards, and more. However, the question often arises: should you keep unused credit cards? The answer isn’t straightforward, as it depends on various factors, including your financial habits, credit goals, and overall financial health.

This blog explores the pros and cons of keeping unused credit cards and guides to help you make an informed decision.

Benefits of Keeping Unused Credit Cards

Improves Credit Utilisation Ratio

Your credit utilisation ratio is the amount of credit you’re using compared to your total available credit. This ratio significantly impacts your credit score. By keeping unused credit cards open, you maintain a higher total credit limit, which can lower your credit utilisation ratio as long as you keep balances low on your other cards. A lower utilisation ratio generally leads to a higher credit score.

Lengthens Credit History

The length of your credit history is another critical factor in your credit score. Having older accounts on your credit report can improve your score because it shows a longer track record of managing credit. Closing unused credit cards, especially older ones, can shorten your average credit history and potentially lower your score.

Access to Emergency Funds

Unused credit cards can serve as a financial safety net in case of emergencies. While it’s essential to have an emergency savings fund, a credit card can provide additional support if unexpected expenses arise.

Potential Rewards and Benefits

Even if you don’t use them regularly, some credit cards offer ongoing benefits such as travel insurance, purchase protection, or extended warranties. These perks can be valuable even if the card is only used occasionally.

Read more: What are credit card interest rates and how to calculate them?

Drawbacks of Keeping Unused Credit Cards

Annual Fees

Some credit cards charge annual fees, and if you’re not using the card, the cost might outweigh the benefits. It’s essential to evaluate whether the benefits you receive justify the annual fee. If not, it might make sense to close the card.

Risk of Identity Theft

Having multiple unused credit cards increases the risk of identity theft. If you’re not monitoring these accounts regularly, fraudulent activities might go unnoticed. Regularly checking your credit report and credit card account statements is crucial to mitigate this risk.

Temptation to Spend

Unused credit cards represent available credit, which can be tempting to use for unnecessary purchases. If you have trouble managing spending or are working to pay off debt, having unused credit cards might pose a risk to your financial discipline.

Impact on Loan Applications

Having too many open credit accounts might raise red flags when applying for a mortgage or other significant loans. Lenders might view it as a risk, fearing that you could suddenly increase your debt.

Read more: 10 hidden credit card charges that you should know about

Best Practices for Managing Unused Credit Cards

Evaluate the Benefits and Fees

Review each unused credit card’s benefits and fees. If the card offers significant rewards or perks without an annual fee, it might be worth keeping. Conversely, if the card has a high annual fee and offers little value, consider closing it.

Monitor Accounts Regularly

Keep track of all your credit card accounts, even the unused ones. Regularly check statements for any unauthorised charges and report suspicious activity immediately. Setting up alerts can help you stay on top of any unexpected changes.

Use Occasionally

To keep the account active and show some activity, use the card occasionally for small purchases. Pay off the balance in full each month to avoid interest charges. This can also prevent the card issuer from closing the account due to inactivity.

Consider Consolidation

If you have multiple unused cards, consider consolidating your credit by transferring balances to one or two cards with the best terms. This can simplify your financial management while still maintaining a reasonable amount of available credit.

Deciding whether to keep unused credit cards involves weighing the benefits and drawbacks based on your financial situation. By evaluating each card’s benefits and fees, monitoring accounts regularly, using cards occasionally, and considering consolidation, you can make an informed decision that best suits your financial goals and needs.

FAQs

1. Does closing an unused credit card affect my credit score?

Yes, closing an unused credit card can affect your credit score. It may increase your credit utilisation ratio and shorten your credit history, both of which can lower your score.

2. How often should I use an unused credit card to keep it active?

Using an unused credit card for small purchases every few months can help keep the account active and prevent the issuer from closing it due to inactivity.

3. What should I do with a credit card that has an annual fee, but I no longer use?

Evaluate whether the card’s benefits outweigh the annual fee. If not, consider closing it or contacting the issuer to negotiate a waiver of the fee or to downgrade to a no-fee card.

4. How can I protect my unused credit cards from identity theft?

Regularly monitor your credit card statements and set up account alerts for any suspicious activity. Keeping your credit card information secure and reviewing your credit report periodically can also help.

5. Is it better to close unused credit cards before applying for a mortgage?

Having too many open accounts can be a concern for mortgage lenders. It may be beneficial to close unused cards with high limits well before applying for a mortgage to avoid raising red flags during the application process.