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WalletPrep worksheet · Credit

Should you close a credit card you don't use?

Name ____________________ Date __________

Key ideas

  1. Closing a card can raise your utilization. You lose that card's limit, but your balances stay. A higher share of your credit in use can lower your score.
  2. A closed card's history doesn't vanish. An account closed in good standing can keep showing on-time payments on your report for years after you close it.
  3. An annual fee is a fair reason. Paying for a card you don't use is a real cost. A small, often brief score dip can be worth it.

Vocabulary

Annual fee
A yearly charge some credit cards add to your bill just for having the card, whether you use it or not.
Credit report
A record of your credit accounts, payments, balances and some public records, kept by each of the three credit bureaus.

Work it out

Priya has three cards with limits of $5,000, $3,000 and $2,000. The $5,000 card charges a $95 fee and has no balance. Her other two cards carry $1,500 together.

  1. Fee card limit
  2. Card 2 limit
  3. Card 3 limit
  4. Total limits
  5. Utilization now
  6. Utilization after closing
  7. Balances on cards 2 and 3
  8. Pay down first
  9. Balance that keeps 15%

Check yourself

  1. You have $8,000 of total limits and $2,000 of balances. You close a card with a $4,000 limit and no balance. What is your new utilization?

    • A. 25%
    • B. 50%
    • C. 40%
    • D. 12.5%

  2. What happens to a card's on-time payment history after you close it?

    • A. It's deleted right away
    • B. It can stay on your report for years
    • C. It turns into a negative item

  3. Which is the strongest reason to close a card?

    • A. It's your oldest card with no fee
    • B. You want to raise your score
    • C. You plan to apply for a mortgage next month
    • D. It charges a fee you get no value from

Your turn

List your cards with each one's limit, balance and annual fee. For any card you want to close, work out your utilization without its limit, and call the issuer to ask about a no-fee version.

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Answer key

Should you close a credit card you don't use?

Work it out

  1. Fee card limit$5,000
  2. Card 2 limit$3,000
  3. Card 3 limit$2,000
  4. Total limits= $10,000
  5. Utilization now15%
  6. Utilization after closing30%
  7. Balances on cards 2 and 3$1,500
  8. Pay down first− $750
  9. Balance that keeps 15%= $750
  1. Now Priya uses $1,500 ÷ $10,000 = 15%. If she closes the fee card, her limits fall to $3,000 + $2,000 = $5,000, and $1,500 ÷ $5,000 = 30%.
  2. To stay at 15%, her balances must be $5,000 × 15% = $750. She pays $1,500 − $750 = $750 before closing.
  3. First she asks for a no-fee version. If there isn't one, she redeems her points, pays down $750 and closes the card.

Check yourself

  1. B. 50% Limits drop to $8,000 − $4,000 = $4,000. $2,000 ÷ $4,000 = 50%, up from $2,000 ÷ $8,000 = 25%.
  2. B. It can stay on your report for years Positive history on a closed account can keep being reported after the account is closed.
  3. D. It charges a fee you get no value from An annual fee that outweighs the card's benefits is a real cost. Closing won't raise your score, and it's best avoided right before a big loan.