Can Unused Credit Cards Hurt Your Credit Score?

Posted: 05 Oct 2010 04:15 AM PDT

When it comes to unused credit cards, there are several schools of thought regarding whether or not to close the accounts or keep them open and use them regularly. There are both deterrents and benefits to closing accounts, so each person should review their own financial situations and credit card specifics before taking action. After all, any action regarding credit cards will affect, either positively or negatively, your credit score.

First, some financial advisors believe that closing unused or rarely used credit cards is a mistake. Many people keep “emergency cards” in their wallets or desk drawers to use in case of unforeseen expenses like home or car repairs. Unfortunately, all open accounts and credit cards costs banks money to maintain. Since unused cards do not accumulate any more debt, they are no longer profitable. This can often cause banks or lenders to preemptively cancel these unused cards. Financial advisors think this could possibly hurt your credit score because it lowers the amount of available credit you have in comparison to the debt you’ve accumulated. For example, say you have $4,000 worth of credit available and $2,000 worth of debt. If a credit card with a $1,000 credit limit is canceled by the bank, you’re available credit drops to $3,000, but your debt remains at $2,000, making your credit-debt ratio 66.7 percent. A ratio like this could lower your credit score, which makes you look like a risky investment to future lenders. To prevent this from happening, these advisors suggest keeping the cards open and using them semi-regularly for expenses that can be easily paid off, like a once monthly grocery bill.

Other financial professionals believe that unused credit cards are unsafe to maintain because they pose potential fraud and identity theft risks. For example, if you have a credit card with a zero balance, it is unlikely you will receive a monthly bill or statement. This opens the door for a thief to get a hold of your card information, change the forwarding address, and begin racking up charges on the account. You won’t be missing the monthly statement and will have no idea that you’re information has been stolen until it’s too late. This school of thought encourages individuals to close unused accounts and carefully monitoring your credit history on a regular basis. These professionals warn, however, that this should not be done if you expect to take out a large loan or mortgage in the immediate future. Again, these actions could hurt one’s credit score.

Whether you decide to close your unused credit cards or keep them open in case of emergencies, you should first speak with a financial advisor regarding your specific financial situation. Both actions might affect your credit score, so it is important to make an informed decision on these matters.

This guest post is contributed by Roger Elmore, who writes on the topics of hospitality management degree. He welcomes your comments at his email Id: rogerelmore24 @gmail.com.

Dollar Matters: Credit and Debt Edition

Posted: 04 Oct 2010 09:00 AM PDT

We all know that some of the most basic personal finance issues have to do with credit and debt. It is also amazing how credit and debt can get you into so much trouble — even when you think you are being careful. Here are some recent articles, focusing on credit and debt, from around the blogosphere:

How to Beat an Adverse Credit History

Your poor credit history won’t necessarily doom you to a life of personal finance failure. Jim at Bargaineering helps you take the steps that can help you overcome your credit history.

Does Your Kid Deserve A Credit Card?

We know that young adults probably ought to build credit somehow. But we’d like our kids to do it responsibly. Free From Broke offers some solid information that can help you decide whether or not your child is ready for a credit card.

Best Student Credit Cards

If you are looking for a credit card to help you get things going, Michael at Cash Money Life offers a brief overview of some solid student credit cards.

What Does It Mean to Have “Good” Debt?

Not all debt is soul-sucking, out to ruin you. Jeff at Good Financial Cents offers a look at the types of of debt that might be able to help you advance your personal finance and life goals.

Debt Pay Down: Car Loan vs. Student Loan

Jill at MoneyWatch provides this brief video interview that can help you figure out whether to pay down your car loan first or take care of your student loan.

Would You Marry Someone Deep in Debt?

When you marry someone, you also marry their finances in a lot of cases. Free Money Finance takes a look at the relationship between debt and people, and encourages you to ask the probing question about whether or not you would marry someone with a great deal of debt.

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