Is it better to cancel unused credit cards or keep them?

If you have an old credit card that is lying unused in your wallet, then you may be tempted to close it. Before you go ahead and cancel it, you need to be aware of the various benefits of having an unused credit card open.

The credit score of an individual is determined by several factors. Of these multiple factors, two have are connected with an unused credit card:

• Length of credit history 
• Credit utilisation ratio

Length of credit history is an indication of how long you’ve been using credit cards. When you close an old card, it erases the associated credit history, thereby lowering the average length of your credit history. This negatively impacts your credit score.

The other factor to consider is the credit utilisation ratio. It’s a numerical value of the credit you’re using to the total available credit for you. The lower the credit utilisation ratio, the better. Let’s explain this with an example. Say, you have two credit cards with credit limits of Rs. 50,000 and Rs. 30,000 respectively. When you close the first card, it brings down the total credit limit available to you, thereby increasing your credit utilisation ratio. When you leave an unused credit card open, it brings down the credit utilisation ratio, thereby dropping your score.

However, closing an unused credit card may be the right way forward if you’re paying a steep annual fee on it. So, make sure to consider your situation carefully, and decide if you want to keep unused credit cards or cancel them.