Do you have a lot of unused Credit Cards? Do you know they can affect your finances? Read on to know more.
When it comes to Credit Cards, most of us have a lot of questions parked in the financial department of our brains. While some of us are clueless about the billing cycle, others have no idea about which Credit Card to go for. Some think that just because their friend got a particular Credit Card, it will make perfect sense for them as well. But sadly, it doesn’t happen most of the time. Different individuals have distinct needs when it comes to finances. As a result, we all need different Credit Cards that cater to our individual needs and preferences.
The problem with these plastic buddies is that you can’t just have one. Once you start using a Credit Card, you start exploring more and more about your spending habits and needs. Gradually, you start exploring more options and get introduced to more plastic friends. As your friend circle grows, you start losing track of all your buddies. In real life, this leads to broken relationships and in the Credit Card world, it means financial clutter. Having more than one Credit Card is good; it diversifies your portfolio. But applying for way too many of them at the same time isn’t that great. It affects your Credit Score. How? We’ll tell you.
Additional Reading: 3 Ways To Improve Your Credit Score Quickly
How do unused Credit Cards affect your Credit Score?
Creating a well-balanced Credit Card portfolio and maintaining it is essential for your Credit Score. If you want to apply for another Credit Card or a loan in future, the lender is most likely to judge your creditworthiness based on your Credit Score. That’s when having a diverse range of Credit Cards can work in your favour. Since the main aim here is to increase the total available credit, all those unused cards can help too. The only thing you need to worry about is the duration for which the cards remain inactive. If they remain inactive for long, your credit history might get affected in a negative way.
Wait. We know what you’re thinking. Factors that determine your Credit Score, right? It depends solely on your credit utilisation ratio. That basically stands for the percentage of available credit you use each month. If you don’t use your card for a long time, the issuer might assume that it’s an inactive account and close it. The duration after which the issuer decides to do this varies from company to company. Legally speaking, the Credit Card issuer isn’t required to keep you informed about the status of your Credit Card. An inactive account is enough for them to close it without any notice. As the total available credit in your name decreases, your Credit Score gets affected as well.
It’s not merely about your credit utilisation ratio, your Credit Score also depends on the length of your credit history. Didn’t get it? For instance, let’s assume that you have held a card for a long time, but it has remained inactive for most of the duration. Now the issuer decides to close it since it’s been inactive for quite some time. Since it is your oldest account, once it gets closed, you will lose out on the benefits of your history and your Credit Score will fall, as well. Closing your oldest Credit Card, therefore, isn’t the best option. As you do that, you also bid adieu to a good credit history. Not something you want to do, right?
All said and done, you don’t always need to continue holding on to an army of Credit Cards. There are ways to decide which ones still make sense for you and which ones need to be closed. For instance, if you have an unused Credit Card that has a high-interest rate or annual fee (or both), closing it is better than letting it affect your finances adversely. Before closing it, you can transfer the balance to some low-interest Credit Card. Instead of letting the card stay dormant for a long time and the issuer having to close it, it’s always better to close it yourself (unless you love bad surprises/shocks). If you want to close a few Credit Cards, it’s better to time the closure right. Why is the timing important? Assume that you’ve applied for a Home Loan. Before sanctioning your loan request, the issuer is likely to check your credit situation, right? Since closing too many Credit Cards in one go can affect your Credit Score, you might want to give it a second thought. Instead of closing those unused cards now, you can always wait for the issuer’s audit to get over. It’ll brighten your chances of getting a loan approval.
Finally, now you know that those unused Credit Cards could be burdening more than just your wallet. They could be affecting your Credit Score in a negative way, which can stir your financial stability over time. Don’t let that happen.
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