Close unused credit card: If you have a credit card that you rarely use, you may be wondering if it is right to close it. This decision may seem simple at first glance, but it can have a huge impact on your financial health. Before closing a credit card, consider these four important factors.
1. Impact on your credit score
First of all, your credit score matters a lot. Closing a credit card can directly impact your credit score, and this is because of the Credit Utilization Ratio (CUR). CUR is measured as the amount of credit used compared to your total credit limit. The ideal CUR should be between 30-40%.
Let’s take an example: if you have two credit cards with a combined credit limit of ₹10 lakh and you have used ₹4 lakh out of it, your CUR will be 40%. But if you close one card and the total limit becomes ₹5 lakh, your CUR will increase to 80%. This spike can have a negative impact on your credit score. Therefore, please think twice before closing the card.
2. Utility in Emergency Times
Even if you don’t use a credit card regularly, it can be very useful in times of emergency. Whether it’s medical emergencies, urgent travel expenses, or any unexpected situation, an active credit card acts as a financial safety net. As long as the card doesn’t have a high annual fee burden, it’s sensible to keep it active. This will keep you prepared for “rainy day” situations.
3. Annual Fees and Costs
The annual fees of a credit card are also an important factor that influences your decision. If the card has a low or no annual fee, it may be worth keeping it, even if you don’t use it regularly. But if the card has heavy annual fees and you are not getting proportionate benefits, you should consider whether keeping the card is financially smart.
Carefully evaluate the card’s fee structure and see if its value justifies it.
4. Reward Points and Exclusive Benefits
Many credit cards offer you benefits like reward points, discounts, airport lounge access, and invitations to exclusive events. If your unused card offers all these, you should consider whether keeping it active may be more beneficial. But ensure that you do not miss the expiration dates of reward points and extract maximum value from them.
Using reward points and taking advantage of the benefits in the right way is a part of financial efficiency.
Final Thoughts
Whether or not to close a credit card is not a simple “yes or no” decision. It is a nuanced decision that depends on your financial goals, spending habits, and the specific features of the card. Sometimes it is better to keep an unused credit card because it maintains your credit score, provides financial security, and unlocks exclusive benefits.
But if the cost of the card does not justify its value, it may be time to close it.
Evaluate these four factors carefully and make the best decision for your financial health and future stability.
