Rhiannon Philps
It can feel great to pay off your credit card, but then comes the question of what to do next.
You might think that cancelling a credit card is always the best option because you’re minimising the chances of racking up debt. However, while ditching an unused card can be beneficial for some borrowers, others may find that it can do more harm than good to their credit score.
Read on to hear experts give their views on cancelling your credit card versus keeping it.
3 reasons to cut up your card
Lenders may be wary of inactive cards
Dormant credit cards could concern mortgage or credit providers, especially if you have several open lines of credit.
Kelli Fielding, managing director of consumer interactive at credit reference agency TransUnion UK, recommends that you “close down any unused credit cards and cancel old agreements as lenders look at the number of active accounts you hold. This also provides potential lenders with a more accurate idea of what credit products are available to you and how they might impact your ability to borrow more.
“For example, if you’re applying for a new credit card but already have a credit card you don’t use, potential lenders may view this as suspicious or be concerned that you could be at risk of taking on too much debt, should you decide to suddenly use the older credit card as well as the new one.”
You can minimise the risk of fraud
Fielding also highlights that closing any unused cards could help to protect you from fraud.
If you have a dormant credit card that you don’t check regularly, a fraudster could use it and build up debt in your name without you knowing.
Cancelling your card removes this danger, but you need to make sure you close your account and dispose of your card correctly to make sure a fraudster can’t use it.
It removes the temptation of overspending
One of the biggest dangers of credit cards is the ease with which you can spend and then potentially get into debt. As Fanny Snaith, a money and life coach, notes, closing a credit card can help prevent you from spending beyond your means, so this could be a wise move if you’ve previously struggled to pay off debt.
However, financial coach Rachel Rowley points out: “Cancelling the credit card doesn’t solve your issue with spending and credit. So, while cancelling the credit card could solve your short-term issue, it’s likely that you’ll get another one in the future and the cycle will continue.
“It would be better to learn how to master your money and create new, and better, financial habits and learn how to live within your budget.”
3 reasons to keep your credit card
It shows you can manage your finances
Lenders like to see long-standing, well-managed accounts when checking your credit file, so continuing to use your card responsibly could help any future applications for credit.
Keeping your card open is particularly important if you have a limited credit history, as it will be one of the only ways that future lenders can view your borrowing history and decide whether to lend to you.
What’s more, even if you have multiple credit cards, keeping them all open isn’t necessarily a bad thing if you can stay on top of repayments. According to Rowley, it shows lenders that you can successfully manage several credit accounts. She also highlights that different credit cards offer a range of rewards, such as cashback or air miles, so it can be useful to have several cards available for different purposes.
Having several cards is only likely to become an issue if you overspend and build up large amounts of unaffordable debt on them.
You can improve your credit score
Many factors inform your credit score, and your credit utilisation ratio is one of them. This is simply the amount of your available credit you are currently using. For example, if you have a total credit limit of £5,000 across three cards and you’re using £3,000 of this, your ratio would be 60%.
Snaith explains how cancelling a card will reduce the total amount of available credit you have, which could increase your credit utilisation ratio and have a negative impact on your credit score.
So, for example, if you have a total credit limit of £5,000 across three cards and cancel one of your cards which has a limit of £1,500, but still owe £3,000 across your two remaining cards, your credit utilisation ratio would significantly increase from 60% to around 85%.
A high credit utilisation ratio can be a concern to lenders, but keeping a credit card open will only help to lower your ratio if you don’t build up significant debt on it.
Ideally, you should aim to keep your credit utilisation ratio under 30%.
It gives flexibility for future spending
Keeping your credit card means you can use it as and when you need it. You may not be planning a large purchase now or be able to predict an emergency expense, but that’s not to say there isn’t one on the horizon. Keeping hold of your card means you won’t have to apply for a new card, which would involve a credit check and leave a mark on your credit file.
As long as you are disciplined and don’t spend unnecessarily, having the same credit card for a long period of time, which you use as and when you need it, will typically be a better option than regularly cancelling cards and applying for new ones.
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