The answer might surprise you
If you own a credit card that you don’t use anymore, cancelling the card seems like a no-brainer. However, credit card pundits would disagree. Unless it comes with an annual fee, you’re better off keeping the card. Even if your card does come with an annual fee, cancelling the card should be your last option as there are other solutions you could consider.
When Should I Keep or Cancel My Credit Card?
To help you decide between keeping or cancelling your credit card, here is a simple flowchart you could follow:
Unused Card that Charges an Annual Fee
If you pay an annual fee, you could choose to downgrade your card by opting for one with no annual fee. So, if you have a credit card that you don’t use but costs you money every year because of these charges, you must consider downgrading to a no-annual-fee credit card. For example, if you have an HSBC Smart Value credit card, you would have to pay INR 499. However, you can choose to switch to the HSBC Visa Platinum credit card that has no joining or annual fees. If you are unable to downgrade your credit card, then you should figure out if the benefits offered by the card are useful.
If you can make use of the benefits in such a way that the amount you save using the card is more than the amount you pay as its annual fee, then you can keep the card. If you don’t use any of the benefits and are unable to downgrade it, then you might as well cancel it. For example, let’s say you own one of the top travel credit cards and pay an annual fee of INR 5,000 for it. If you travel five times a year, then you might not accrue enough miles to claim a discount that could be worth more than INR 5,000. In such a case, you consider switching it a card that suits you better.
Unused Card that Does Not Charge an Annual Fee
If you do not pay an annual fee, you could probably consider changing the card variant. Perhaps, your current card does not provide the benefits that complement your lifestyle. In such a case, you could check out other cards that could be of use to you. If you do not want to check your credit card, then the only reason you would want to keep it is to maintain a good credit history.
Does Cancelling my Credit Card Affect my Credit Score?
A credit score is a metric that indicates your creditworthiness. The score is calculated based on numerous factors. The two factors that you should be concerned about is the age of your credit history and the credit utilisation ratio. Cancelling your credit card affects your credit score in two ways:
Decreases average age of accounts
The longer your credit history, the better it is for your credit report. The age of accounts is generally accounted as the average age of accounts that you own. For example, if you own three credit cards with the ages—3,6, and 9, the average age is (3+6+9)/3 which is 6 years. If you cancel one of them, the average age would naturally decrease. Although the cancelled account still appears in the credit report, it will not be included 7-10 years later. Thus, the effort you would have put it into maintaining that account might go in vain.
Tip: To minimise the damage, it’s best that you cancel newer credit cards rather than your old ones. Always keep your oldest cards active.
Decreases the amount of credit you can utilise
Credit utilisation ratio is the ratio between the total credit available and the amount you use. In simple words, if you borrow INR 1000 every month, and use only INR 200 that month, then your credit utilisation is 20%. Keeping your credit utilisation below 30% portrays yourself as someone who can be trusted with more credit. Your credit utilisation ratio is affected when you cancel one of your credit cards. For example, if you own 3 cards with the limit—INR 10,000, INR 12,000 and INR 20,000, your total credit card limit would be INR 42,000. Thus, if you use 12,500, your credit utilisation ratio would be 30%. If you cancel one of these cards and utilise the same amount of credit, your credit utilisation ratio would naturally be higher than 30%.
Tip: You can transfer the available credit on your unused card to a card that you use more frequently.
Is it Worth Keeping Unused Credit Cards?
Assuming you have a credit card that has no annual fee and you care about your credit history, it is definitely worth keeping your credit card even if you don’t use it. Here are a couple of reasons why:
It Does No Harm
A free unused credit card does not cause any harm apart from occupying more space in your wallet. Even if you don’t use a lot of its benefits, for the sake of your credit score, you should consider keeping it.
Emergency Line of Credit
It’s always good to know that you have back-up funds on a rainy day. While it is generally not advised to use a credit card for emergencies, it still brings about a sense of financial peace of mind.
Considering you’re not running away from debt and are simply not using your credit card, it might not make sense to cancel your credit card. Keeping credit card accounts open, especially when you are not aggressively using them, can help you build a good credit history. Having an exceptional credit report can be useful to avail loans in future or get you better rates when availing insurance.
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