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Q. I have several credit cards that I never use, and they have no annual fee. Should I cancel them so I don’t have to worry about ID theft?
A. Identity theft probably shouldn’t be as big a concern as what the cancellations could do to your credit score.
For starters, those credit cards may contribute to your credit scores, and canceling them may mean your scores drop, said Gerri Detweiler, director of consumer education for Credit.com.
That’s because a significant factor in your credit scores is your debt usage ratio.
“This ratio compares your available credit limits to your balances, both on individual accounts as well as in the aggregate,” Detweiler said. “Consumers with the highest credit scores tend to use less than 10% of their available credit, though it is still possible to have strong scores and use 20 to 25% of your available credit.”
When you close accounts, the credit limits of the cards you close are no longer part of this calculation.
If you have plenty of other available credit, and closing these accounts won’t significantly affect this ratio, then you don’t have to worry about it, Detweiler said. But if closing these will push up that ratio so it’s higher than the 20 to 25% range, you may want to reconsider, she said.
Also keep in mind that when you close accounts, it could have an impact on the age of your credit history, which is another part of your credit score.
“When it comes to your credit scores, experience helps,” Detweiler said. “Credit scoring models usually consider the age of the oldest account and the average age of all accounts.”
While closing an account does not remove it from this calculation, eventually, closed accounts may no longer be reported, she said. This could take 10 years to happen, she said, so it’s probably not an immediate concern.
If You’re Going to Do It
If you decide you want to cancel the cards, start by paying off any outstanding balances you have on the cards that you do use. This will improve your overall credit profile, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.
He recommends you gradually cancel your unused cards because if you cancel them all at once, you may see a spike in your debt usage ratio, which will hurt your credit score.
You may also want to keep the cards with the highest limits open, he said.
And if you’re considering applying for a loan, you may want to wait before closing down any accounts, Papetti said.
As for your concerns about identity theft, Papetti said you’re correct in thinking that the more open credit cards you have floating around, the more exposure you have to identity theft.
“While this is a small risk, it does exist, however it can be managed by subscribing to one of the manycredit monitoring and protection services,” he said.
Detweiler also reminds you that consumers have certain liability protections for fraudulent charges on credit cards.
“It can be a hassle to deal with fraud,” she said. “One option with these accounts is to see if you can set up online alerts to notify you if there is activity on the account.”
And don’t forget to check your credit report, which you can do for free once a year at AnnualCreditReport.com. You can also see a free credit report summary, updated monthly, at Credit.com.