Have you ever responded to a credit card offer and then changed your mind about using the account? Should you call the bank and cancel that card? Isn't it better to get rid of a card you don't want to use?
Surprisingly, no. In most cases, you're better off keeping the account open. That's because closing credit card accounts - even ones you don't use - can lower your credit score.
Your credit rating is calculated on a number of factors, including your payment history and your credit utilization rate. The credit utilization rate is the percentage of the total credit available to you that you're currently using.
Credit bureaus generally like to see a credit utilization rate of 30 percent or less. As your utilization rate goes up, they see you as more of a credit risk, and your credit rating may go down.
Supposed you have three credit cards:
The amount of credit available to you with all three cards is $10,000. You owe a total of $2,000 on those cards, so that puts your utilization rate at 20 percent - a number that credit bureaus like to see.
But if you cancel that new card with the $5,000 limit, the total credit available to you is now just $5,000, and your credit utilization rate shoots to a less desirable 40 percent.
Of course, if you don't use your card at all you may find that the issuing bank closes the account for you. There's no definitive rule about how long this will take - each bank has its own rules - but don't be surprised if you get a closed notice after two years or so. After all, banks don't make any money when you're not using your account - no interest payments from you, and no fees from merchants who must pay processing fees to accept the credit cards. Unfortunately, having a bank close your account can also hurt your credit record just as much as closing the account on your own.
If you can handle using the additional credit, your best course of action - at least in terms of your credit record - may be to use the credit card occasionally and pay it off when you get your monthly statement. That can help build your credit record.
If you're still determined to get rid of some credit cards, the new unused card may be a good choice. If you have an older card on which you've maintained regular payments, you want to be sure that history continues to show up on your credit report. Your new, unused card doesn't have any credit history associated with it.
But you'll also want to consider how closing the new credit card will impact the amount of credit available to you. Before you ask the bank to close your account, pay down your balances on other cards so that your credit utilization rate with your remaining cards will stay at 30 percent or below.
If the new credit card is only one of several that you want to get rid of, don't close them all at once. Spreading the closures out over several months will help reduce the impact on your credit record.
You can also take some proactive action to keep your credit score high. Check out the Five Tips for Improving Your Credit Score from the Federal Reserve Bank.