If you have an old credit card that you don’t use anymore, should you keep the account open or close it?
In most cases, the best answer is to keep it, because it can help increase your credit score in several ways.
3 Reasons You Should Keep Old Credit Card Accounts Open
When it comes to old bank accounts and investment accounts, fewer is usually better. But credit cards are the opposite.
Your credit report is made up of five main inputs, and a well-managed credit card can help you with more than one. Here’s a quick breakdown of the areas where your credit cards can help with your credit score and credit report.
- Credit utilization: The place you can see the most direct benefit of keeping an old credit card open is your credit utilization ratio. You should use less than 30% of your available credit across all accounts. More open credit means it’s easier to stay below that 30% threshold.
- Average age of credit: Lenders look at people who have managed credit well over a long period of time as a lower risk, so the average age of your credit accounts is another factor in your credit score. While it matters less than your credit balances, don’t discount the power of an aged account in lifting up your score.
- Account mix: As long as you always pay on time and in full, more accounts are better. Keeping one you already have (even if you don’t use it much) is a good way to maintain a diverse set of accounts that demonstrates to credit card companies that you’re responsible.
How to Keep Old Credit Cards Active
If you have an old card, don’t put it at the back of the drawer and forget about it. Instead, you’ll need a plan to keep the account active. If you never use a card, the issuer may close it due to being inactive.
This happened to me twice in the past, and now I use one of two strategies to keep them open.
1. Use the Card Every Six Months
One option is to simply use the card every once in a while to keep it active. Most banks won’t purge accounts that have had activity in the last year, but it is best to use a card at least every six months to be safe. I sometimes use an old card for lunch or another fairly small purchase, pay it off as soon as the charge shows up on the account online and set a calendar reminder to do the same thing in another six months.
2. Make a Small Recurring Purchase
The second option is to put a small recurring purchase on the card. I have a few subscriptions that cost less than $15 per month, and I put one each on cards I don’t use for anything else just to keep those cards active. I also turned on automatic payments for those accounts so I never have to worry about paying. Just keep an eye on them using a budgeting app such as Mint or check online periodically to make sure no unauthorized charges show up on the account.
When It Makes More Sense To Close the Account
While it’s good for your credit to keep an account open, you shouldn’t do it in every case. There are some situations where you are better off closing the account than keeping it open.
First, if you have a spending problem that is exacerbated with credit cards, don’t keep a bunch of credit cards around.
Clark Howard is a big fan of credit cards but only when you pay them off in full each month by the due date. If the cards lead you to spend more overall or lead to have to pay interest, you should avoid them.
You should also consider closing accounts that carry annual fees if you don’t take advantage of the benefits the cards offer.
For example, some top travel credit cards and cash back credit cards charge an annual fee. If you have a card that charges a $95 annual fee and you get at least $95 in value from it, you are in good shape.
But if you stop using the card and don’t get any benefits, you may be better off closing the account.
Pro Tip: Get a Retention Offer or Downgrade Your Account
Try to get a retention offer or downgrade before closing a credit card account. I recently called to close a card with an annual fee that I no longer considered worthwhile for my needs. When I called, the operator transferred me to a retention department, and that’s where I got an offer for a new card bonus with a certain spend requirement. It was a good offer, so I kept the card and earned the bonus.
If you can’t get a good retention offer, ask about downgrading to a card with no annual fee. I recently converted my old American Express EveryDay Preferred to the EveryDay card when I shifted my spending habits to a card with better rewards. Downgrading meant I didn’t have an annual fee but could keep the account open for credit building purposes.
Unless they will cost you money through extra spending, interest or annual fees, you should keep old credit cards open.
Using a combination of factors including credit cards, I have been able to build my credit from around 700 to 820+ by opening new cards regularly.
If you are responsible and can keep it all under control, don’t ever close old credit card accounts. Instead, keep them open to build your credit.
The benefits of a better credit rating can be worth tens of thousands of dollars or more in the long-term.