Congratulations! You just paid off your credit cards!  Now you are asking yourself, “should I close my unused credit cards or should I leave them open.  Is there a right answer?  I know there are a few “financial gurus” out there that will tell you to close that evil card that is trying to trap you in financial bondage, but this is where you have to decide is your credit card a tool for you to use or just a trap that will put you back underwater?

There are other important questions to ask yourself too.  First, if you cancel an unused credit card will it affect your credit score and credit report?  Did you know that an unused card is part of your credit utilization ratio an does impact your credit score? As with most financial questions, there is more than one correct answer to deciding whether it’s better to close a credit card or leave it open.  In my case, I’m leaving them open.  It’s not always that simple though so let’s take a look at why you might close them first.

Reasons to Close an Unused Credit Card Account

What if you have poor money management?

Here’s the number one reason to close it.  You suck at managing your money and can’t resist spending when you have available credit in your pocket.  I get it.  Sometimes you just “need” stuff.  If you’re in this boat, you are probably going to sink.  I’d tell you to cancel it with your card issuer as soon as you pay it off, and you can go ahead and destroy the card right now too, that way at least it becomes the out of sight, out of mind type of potential financial hazard and you won’t hurt your credit by getting into too much debt.

Can authorized users on your credit card affect your credit score?

Want another reason to close the card?  Maybe you have another person on the account with you and don’t want to risk them using it after you’ve worked so hard to pay it off.  Maybe they are the problem.  Maybe you don’t want to talk with them about it and it’s just easier.  Getting separated from the problem may be a great way to get you going towards your own financial independence goals.  If they use the card and you are unaware it could affect your credit score.  Again if this is the case you may want to cancel a credit card.

How high is the interest rate?

Another reason?  The interest rate is too high.  Yeah, that’s right, you get in the habit of carrying a balance, but the credit card issuer is a retail store and your interest rate is at something like 25%. Trust me, it’s not worth it.  Whatever deal you may have received by opening it, like save a whopping “10% on your purchase today”, usually isn’t worth the interest expense you’ll pay by carrying any kind of balance.    Beware of your other regular (Mastercard, Visa, American Express) cards too.  If you’ve ever been late on your payments you may be paying a high rate on your credit card balance.  Most cardholder agreements have a built in delinquency rate that is up in that 25% range.  These high rates don’t always adjust back down when you make your payment and bring the account current again either.  Often the rate stays high from that point on, so watch out.

Is there an annual fee?

Lastly, if you are paying an annual fee for your credit card, close it and avoid the fee.  If you can’t find any real use and there are no real benefits to keeping the card, then the decision is simple.

Keep in mind that there are a number of really great uses for credit cards that you need to carefully consider before closing a credit card account.

Reasons to keep an unused credit card account open

Although paying off your debt and closing credit cards generally is a good idea, especially for those who are weak and prone to use them again and build that balance back up, there are also some really good reasons to keep those credit cards open with a zero balance.

Keep an unused credit card for emergencies.

Here’s my first one.  Emergencies.  They happen to all of us.  Sure, you should have an emergency fund to take care of these things, but that might not be the case for everyone.  If you’re still working on it you may need to have it as a backup, just in case.  I know there are others who have it as an emergency fund because everything else is invested and it may take a few days to get the funds transferred around from selling securities, to sending it to your checking account.  Using the credit card and the grace period that comes with it can be a great way to avoid the stress of moving money around in a hurry.  Just make sure you do it within the grace period and pay it off.

Can an unused credit card affect your credit score?

The short answer is yes, an old unused credit card helps your credit more than a new credit card.  If you leave your zero balance card open, it helps your credit.  You may think the responsible thing to do is close a card that you no longer need.  You’re right, but you can be responsible and keep the card open as well.  Did you know having a card open and available to use can help your credit score?  One of the factors used to calculate your score is called your credit utilization rate.

How does Utilization Rate, or use of total available credit affect my score?

Simply put, the less of your credit limit you use of what you have available the better.  Having an unused card open can help with your total credit limit.  This is simply comparing the total credit you have available to the total balance you owe.  The lower the number the better.  You can read more about credit utilization rates here.

Here’s a quick example.  Say you have two credit cards and they each have a limit of $5,000.  You just finished paying off the first one and still owe $2,000 on the other.  If you close one card you are using $2,000 of your available $5,000 for a utilization rate of 40% (this is too high).  On the other hand if you keep the zero balance card open you are using $2,000 of the $10,000 available for a utilization rate of 20% which is better.  Ideally you want to be below 10%.  So keeping that old credit card and the amount of available credit you have won’t hurt your credit score.

Does unused credit card history hurt your credit?

No, rather it helps.  Another reason to keep an unused credit card open is to maintain a long credit history.  This is simple really, the length of your credit history, or the longer you have a credit line plays a role in determining your credit score, and a longer credit history can be beneficial to your score.  Credit reporting companies look at the average age of your accounts.

If you keep opening and closing credit cards the average length of credit history stays short and will have an impact on your credit score.  Additionally, having an older credit card can help demonstrate a consistent payment history and a track record of responsible credit use.  By keeping the credit account open, especially the oldest account that history keeps growing and growing.

In summary, the age of your credit card history matters and its something you should consider if you are deciding to cancel unused credit cards or keep them open.

Can I make money with my unused credit card account?

Making money doesn’t come up much when talking about keeping those zero balance credit cards open, but after a couple of years, this one is one of my favorites and something to consider before you close an account.  You may have heard about selling tradelines, or maybe not.  Here’s a quick overview of how it works.  There are people who are looking to boost their credit score and you are there to help.  They may be trying to make a large purchase and the better their score, the less they’ll pay in interest or the more they’ll receive in an available credit limit.  When you sell a tradeline you are adding an authorized user to your card so they can get the benefit of your zero balance and long credit history.  It may sound a little complicated or risky, but it works.  I’ve done this for a while now and you can read all about how to sell tradelines here.  I mentioned closing those cards with an annual fee above, but this benefit might outweigh the fee.  With some tradeline companies you can earn over $200 per authorized user every 3 months or so.  Give you something to think about, right?

Conclusion

My opinion?  Keep those cards open.  For me the benefits for keeping a zero balance credit card open outweigh the alternatives.  You improve your credit utilization ratio, the age of the card helps factor in your credit score.  What about retail store cards?  I don’t have individual store cards.  I haven’t come across one that actually had a good enough benefit to use it or keep it open so I don’t know the credit score benefits, but in general if there is no cost you can have the card without hurting your credit.  What’s your conclusion?  Would you close cancel your credit card if it was unused?