With the new credit card rules having taken effect from 22nd of February, 2010, it’s quite clear that the credit card companies will now lose lots of money as the new laws impose restrictions on charging high rate of interest and various fees. It’s also evident that the credit card companies will now look for loopholes in the new act to charge various fees in order to make profit.

In such a situation, many consumers are worried about the annual fees, inactivity fees and other charges that can hit them for not using credit cards for a long time. Thus, it becomes a relevant question if a consumer should close his unused credit cards to avoid being hit by numerous fees.

Does closing unused cards affect your credit negatively?

Closing your credit cards can affect your credit adversely. This is because of the effect the credit utilization ratio has on your credit scores. It is actually a ratio between your credit card balances and the credit card limits. For instance, if you have a credit limit of $5000 and your credit card balance is $2500, you’re using half of the credit card limit and your credit utilization is 50%. If this credit card utilization ratio increases, your credit scores go down.

For example, let’s say, you have an open credit card with a credit limit of $4000 and credit balance of $2000. Now, you also have an unused card with a limit of 4000 and balance of $0. Your total credit limit will be $8000 and your total credit card balances will be $2000. Hence, your credit utilization ratio is (2000/8000) % or 25%. Read the rest of this entry »