You have been working for 10-15 years. You kept applying for various credit cards over the years depending on your expense preferences at a particular time. As a result, you have accumulated too many credit cards. You do not even use all the cards. You have not used some of them for a couple of years. What do you do? Should you consider closing the credit cards that you use rarely?
How Many Is “Too Many”?
If you ask me, 2-3 is enough. I cannot manage any more cards.
A few card holders are quite enterprising and can juggle between many cards to maximize the benefits out of their credit card portfolios. Most of us cannot do that.
The Problems with Owning Too Many Cards
#1 Annual Fees
You must pay the annual/renewal fees on a credit card whether you use the card or not. Your bank can sometimes waive the card fees if you use the card a lot. There is no such relief when the card is unused and that is expected too. The bank cannot waive off the fee if you provide it no avenue to earn from the relationship.
Yes, not all credit cards may have an annual fee, but paying the annual fee for a credit card that you do not even use is clearly poor judgment.
Plus, the bank may charge you something on some pretext or the other. If you don’t pay those charges out of dispute or simply because you didn’t notice, your credit score will be affected. Now, this may happen rarely, but this is an unnecessary headache for the card you don’t use much.
#2 Potential Misuse
If you do not use a credit card, then there is a chance that it may get misused. You may lose the card but may not even notice that the card is missing/stolen. Yes, there are safeguards in place to prevent unauthorized transactions. For instance, you need OTP to complete domestic online transactions. However, there is no safeguard for physical transactions or international online transactions.
To prevent misuse of cards that you use rarely, you must block all kinds of transactions on those cards or temporarily block the card. You can easily do this from the mobile banking app. And when you have to the card, you can temporarily enable transactions on the card and disable again after use.
#3 More Is Difficult to Manage
When you have more cards, you must keep track of many dates. And you can sometimes miss payments that can affect credit scores.
Using multiple cards complicates budgeting. You may lose real-time track of how much you have spent in the month. You may end up spending more.
The Problems with Closing an Unused Credit Card
#1 Your Credit Score May Get Affected
Credit bureaus consider the age of your loan or credit card account when calculating your credit score. This makes sense too. A borrower who has been regular with his/her payments for 8 years is a more reliable borrower than a card holder who has been reliable with payments for just 8 months.
While the credit bureaus use a proprietary algorithm to calculate credit score, you will find such indications in documents on their websites.
An interpretation could be, if you close an old credit card, the average age of your credit will reduce, and this may affect the credit score adversely. However, there is an aspect I have never been able to understand. Even when you close the card, the credit bureaus still have information about the closed card and can use the information to calculate your credit score accurately. Hence, if the methodology penalizes you for closing an old card, it is just a flawed credit score methodology.
On the other hand, there may be more genuine reasons due to which your credit score may decline. The credit bureaus consider credit utilization ratios. A high credit utilization is not considered good. If you close a card, the denominator goes down and that can push up the utilization ratio.
#2 Missing Discounts or Cashback Deals
I closed a credit card from a foreign bank many years ago. Why? I had 2-3 other cards that I used more often. Additionally, there were never any offers on this credit card.
Recently, I have noticed that many apps have been offering discounts on credit cards issued by that bank. When you close a credit card, there is a chance that you might miss a discount/cashback deal on that credit card.
What Should You Do?
If you have more credit cards than you can manage, start closing the ones that you rarely use. The pros will likely outweigh the cons. The ones with an annual fee and not-so-great benefits should also feature high on closure priority. Yes, it is possible that a great deal may pop up on Amazon or MakeMyTrip right after you close the card. Just accept that these things will happen and manage with the cards you have.
On the other hand, if you own just a couple of cards but use only one of them more frequently, it is fine if you continue to hold less-used cards.