Do you have an unused credit card or two in your wallet? Maybe you got a “starter” credit card years ago with few perks and can now qualify for much better products. Or maybe you’re tired of paying for a credit card whose benefits you aren’t using.
There can certainly be some good reasons to cancel a credit card, but there is also a potential drawback to be aware of. Here’s a quick guide to some of the best reasons to get rid of a credit card, and one big reason you might want to keep it after all.
1. Your spending is getting out of control
Credit cards are designed to get you to spend as much as possible. That’s the point of all the welcome bonuses, 0% intro APR offers, and rewards programs. Credit cards are a business, and like any business, the goal of the credit card issuer is to maximize profitability.
To be clear, all of the welcome offers, promotional financing, and credit card rewards can be valuable financial tools if you use your credit cards the right way — meaning that you avoid carrying high-interest balances. But if you’re finding yourself having trouble maintaining wise spending habits, it can be a good reason to close your credit card(s).
2. You are tired of paying an annual fee
This is one of the best reasons to close a credit card. To be clear, in a lot of cases, it could be well worth paying an annual fee — even a high one — if you get value from the card’s benefits. But if a credit card has an annual fee, and the value you get from the card doesn’t justify continuing to pay it, it can be a smart idea to close it.
It can be especially worth a closer look if your credit card’s annual fee is about to increase.
3. Your interest rate is too high
The average credit card APR is nearly 25% as of December 2023. However, 0% intro APR offers on purchases and balance transfers are still very easy to find. If you need to carry a balance and have a decent FICO® Score, there’s no reason to pay tons of interest. It can make good financial sense to open a balance transfer credit card and get rid of the high-interest plastic in your wallet.
One reason to think twice
Closing an old or unneeded credit card might seem like a smart financial move, and it certainly can be, but there is one big drawback to keep in mind. It might surprise you, especially if your credit card has been sitting unused for a long time, but closing a credit card can damage your credit score — at least in the short term.
There are two reasons for this. First, the second most important category of information that makes up the FICO® Score is “amounts you owe.” This doesn’t necessarily refer to the actual dollar amounts you owe, but the amounts you owe relative to your available credit.
Consider this example. If you owe $2,000 on your credit cards and have total credit limits of $20,000, you’re using 10% of your available credit. If you close two unused credit cards that each have $5,000 limits, your total available credit will drop to $10,000, and you’re now using 20% of your credit even though you haven’t spent another dime. This could hurt your score in the “amounts you owe” category.
There’s another category called “length of credit history” that makes up 15% of your FICO® Score. If you’re closing a credit card that has been open for a while, it could harm you in this category as well. Among other time-related metrics, this category considers the average ages of your credit accounts and the ages of your individual accounts. Keep this in mind, especially if you’re thinking of closing a starter credit card that you’ve had open for many years.
The bottom line
To be perfectly clear, although your credit score could take a short-term hit, it isn’t likely to have a devastating impact. And depending on your reasons for closing the account, it could certainly be worth dealing with a temporary credit score decline — for example, getting rid of an unnecessary annual fee. Just be sure to consider the pros and cons before calling to close your account.
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