I have a bunch of old credit cards that I no longer use. Should I cancel them or let them gather dust?
Cancelling Old Cards
It’s a question that tends to come up as people look at their finances for the new year. And the answer is, well, as always, it depends…
If the card has an annual fee and you don’t use it, go ahead and cancel it. No reason to pay $95 per year for a piece of plastic that sits in your drawer.
If the card doesn’t have an annual fee, your first instinct might be to cancel it, thus freeing up credit to get a different card, or at least to make your credit report look prettier.* That might be a mistake. Your credit score is based on a number of factors, but one of the most important is your credit utilization. Utilization is defined as the percentage of your total credit that you use. So if you have $50,000 in credit available and use $5,000 per month, your utilization is $5,000/$50,000, or 10%. But if you cut up a credit card that had $25,000 available, your total available credit is now $25,000, and that same $5,000 in use represents 20%, instead of 10%.
Clearly, paying your bills on time, which represents 35% of your total score, is the single most important factor in determining your score. But utilization is close behind with 30%, so try to keep that number as low as possible.
*Beginner’s Hint: The new year is also a good time to pull your credit report. Each of the three major agencies will give you a free report once per year, so if you spread them out, you can check your credit every four months.
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