Should you cancel an old credit card that you don't use anymore?
The average Canadian consumer had an average credit card balance of $2,121, according to a recent Equifax Canada survey.
Many Canadians have one or two old credit cards that they no longer use. Before you jump to close your old, unused credit card, here are some of the pros and cons of closing a credit card account, so you can make the most informed decision.
WOULD CLOSING YOUR OLD CREDIT CARD IMPACT YOUR CREDIT?
Credit cards can be successfully leveraged to improve your credit rating, convincing lenders that you’re a trustworthy borrower who pays their debts on time. Conversely, carrying over large balances, missing payments, or applying for too many credit cards in a short amount of time can hurt your credit rating, according to Equifax.
What about old credit cards, though?
According to Equifax, some of the key factors that play into your score are:
- Payment history
- Credit utilization
- Amount of available credit
- Total length of your credit history
- Hard credit inquiries
- Public records
HOW CANCELLING A CARD CAN AFFECT YOUR CREDIT RATING:
Total available credit
Closing a credit card will immediately decrease the amount of total available credit that you have access to. For example, if you have $10,000 worth of available credit, and you close an old credit card with a $2,500 limit, then your updated amount of total available credit will be just $7,500.
Credit card utilization rate
Your credit utilization rate is directly impacted by the total amount of available credit that you have access to. Generally speaking, a high credit card utilization rate (using more than 30% of your total available credit) can hurt your credit score.
Let’s just say that you have $10,000 worth of available credit and $1,000 worth of credit card debt. This would put your credit utilization rate at 10%, which isn’t bad.
However, if you closed an unused $3,000 credit card, your total available credit would be reduced to $7,000. Assuming that you still have $1,000 of credit card debt, then your new credit utilization rate would be over 14%, which is considerably higher.
Age of accounts
Looking at Equifax Canada’s website, you’ll see that the age of your oldest credit card accounts for 15% of your total score. If the card you’re thinking of closing happens to be your oldest credit card, then closing it could dramatically reduce the age of your oldest credit account.
This, in turn, could have a negative effect on your score, as your oldest credit card account age would be updated to reflect the next-oldest card that you own.
However, if the card you’re thinking of cancelling is not your oldest card, then this credit rating factor wouldn’t be affected by closing the account.
Benefits of keeping your old credit card account open
To summarize, here are some of the key reasons and benefits of keeping your old credit card account open (even if you don’t use it anymore):
- It can keep your credit utilization rate low
- It contributes to your total available credit
- It may help your credit age appear older
- It can be useful in emergencies
- It can keep your credit utilization rate lower
By keeping your old unused card open, your credit utilization rate will be lower. Since your utilization rate is determined, in part, by the total amount of available credit you have. Keeping a card open shows that you’re using less of your total available credit than if you were to eliminate the credit line.
It can extend your average account age
If the credit card happens to be your oldest credit card (which is often the case with an old unused card), then keeping it open will positively affect your credit rating. Closing it could decrease your credit age.
It can be useful in emergencies
Last but not least, keeping your old credit card open can be useful in emergencies. You never know when an emergency repair or expense may come up out of the blue. Using your old credit card to cover the expense is a lot easier than going through a lender and applying for a third-party loan.
Why you may want to close your old credit card
Although there are plenty of benefits to keeping your old unused credit card open, here are some reasons why you may still want to close the account.
Eliminate the card’s annual fee
Many cards come with an annual fee required to keep the account open. If this fee becomes troublesome, then closing the account will eliminate the fee.
To decrease uncontrollable spending
Recent Equifax polls indicate that Canadians’ consumer credit card debt increased by 17.5% in early 2022. If you have a spending problem that can’t be managed by locking the card in a safe, then closing the credit card could help you reign in your bad spending habits.
THE VERDICT: SHOULD YOU CLOSE YOUR UNUSED CREDIT CARD?
Overall, keeping your old unused credit card open has far more benefits than cancelling the account. Closing the account could increase your credit utilization rate and decrease your credit age - both of which can negatively impact your credit.
If you’re scared of losing (or using) the old card, I recommend locking it in a safe box or keeping it somewhere safe and out of sight. If you need it for emergencies, it will be there.
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Many Canadians have one or two old credit cards that they no longer use. Before you jump to close your old, unused credit card, CTVNews.ca contributor Christopher Liew outlines some of the pros and cons of closing a credit card account, so you can make the most informed decision.