Unused Credit Cards; Risks of Old Credit Cards In UAE
There is a belief that unused credit cards have risks of credit rating. A common man gets much advice to cancel old credit cards to get a better credit rating in the UAE. Let us check the details of these beliefs and advice.
A credit card is not a luxury instrument anymore. Older days of its inception, only select categories were eligible to get one. There were too many inquiries by financial institutions and banks and filtering to find eligible holders. These plastic cards are a daily life item of almost 100 percent of people who are having a bank account now. Those who are not having bank accounts also have credit cards now.
Normal thinking of a person will go in a way that old and unused credit cards must cancel. The credit limit of that card will add up to the holder’s credit rating points. But when we consult a financial advisor who know the credit rating system will have another say.
Credit Card Burden?
A credit card that is not used for long time is not a burden as many of us think. The more aged it is, more our credit worthiness if unused or partially used with proper payments. There are some suggestions based on situations that will help taking a right decision:
A Card without an annual fee – It is not always better to keep cards without annual fee. Just remember the basic principle – nothing comes free. If there is nothing to pay, the returns also will be nil or minimal. So, think and take a decision of ‘no’ benefit or ‘with’ benefit is better.
The card with an annual fee – a card that charges annual fee will definitely have rewards for the customer in return. These rewards will be from their business associates world wide and there are lot of chances for a wise card user to make more benefit than the annual fee. Question of cancelling a card should raise only after comparing losses and gains. If the gains including better credit usage average is less than the amount of fee, it is better to avoid the card.
For example, if the annual card fee is AED 300 and the total cash back and service usage such as valet parking, cinema tickets, cash back offers etc. in total comes to AED 150/- only, there is no point in making a loss. But in normal case, cash back offers and usage of airport lounges (if available) will definitely make a gain situation for a person with an above average financial evaluation capacity.
Credit Score and Unused Credit Card
In most cases, canceling an unused credit card affects the credit rating of a person negatively. Old credit card gives a aging benefit of credit usage. One 10-year old credit card only gives you 10 year’s average credit age. But a new zero-year old credit card and a 10- year old card gives you 5-year average credit age. Longer credit average age is better for credit rating.
Another factor is average credit utilization percentage. Lower percentage gives a better credit rating. To understand the same, we can take the above scenario.
For example, think that 10-year old card has AED 10,000 credit limit and the zero aged card has AED 15,000 credit limit. The total credit limit is AED 25,000 in this case. Assuming the outstanding amount is AED 5000/-, the average of credit utilization is 20% – that is 5000 on 25000. Suppose the first card is cancelled – the average credit utilization shoots up to 30% – that is 5000 on 15000.
Cancel Old Credit Cards or New Credit Cards?
If there are multiple free credit cards are there, it is better to cancel new free card. This is due to the average credit age. A properly maintained old card is always better than a similar new card. There may be only one difference – the increased credit limit. If you are not going to affect with the credit limit change, it is always good to cancel the new credit card.
Is it good to keep unused credit card?
If the card is not harming your budget, it is better to keep an unused credit card. It is better to keep an old free credit card active for the sake of credit age. If a paid credit card gives more benefits than its annual fee, it is also advisable to keep it active. Cancelling the newer card is the wise decision.
link: Unused Credit Cards; Risks of Old Credit Cards In UAE