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
Balance-to-Limit RatioThe 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?