If you end up with too many credit cards or if you’ve been accumulate too high a balance on them, you may be considering closing a credit card. While this can make your life easier, there are some complications to be aware of.
Contrary to what the TV sitcoms may have taught you, canceling a credit card involves more than just slicing the physical card in half and throwing it in the trash. And it could hurt your credit score by affecting the length of your credit history and your credit utilization rate. We will tell you how to cancel a credit card without destroying your credit and how to know if canceling your credit card is the best option.
Here’s why canceling a credit card usually hurts your credit score
Closing your credit card accounts typically affects your credit in two ways – by altering the length of your credit history and by affecting your credit utilization rate – two factors that help determine your credit score.
It changes the length of your credit history
Your credit history is 15% of your credit score and includes the age of your oldest card, your most recent card, and the average age of all your cards. A longer credit history can increase your score.
Closing your oldest card could lower your average and lower your score. But the impact won’t happen right away. Typically, a closed and in good standing credit card will stay on your credit report for 10 years, so it may take some time before closing an older card account affects your score.
It can increase your credit utilization rate
Your credit usage can be found by dividing your card balances against the total credit limit of all your cards. For example, let’s say you have a balance of $ 500 on all cards and the total limit on all of your cards is $ 5,000. Your credit utilization rate would be 10% ($ 500 divided by $ 5,000 equals 0.1 or 10%). If you close a card with a credit limit of $ 1,500 and a balance of $ 0, your credit utilization rate will drop to 14% ($ 500 divided by $ 3,500).
The higher your use of credit, the more risky you seem to creditors and lenders. This is because it can be a warning signal that you are in financial hot water or having trouble meeting your bills, so you are resorting to plastic. So where should your credit usage be? The rule of thumb is to aim to keep it below 30%. Credit usage makes up 30% of your credit score, so keeping your usage low is important if you want to maintain a strong score.
When to close a credit card makes sense
So, is it bad to close a credit card? Not necessarily. While this can affect your score, there are a few cases where it can make sense:
- High APR. If your balance is high and you only make the minimum payments on your card, and the amount of interest you pay on a card becomes large, it may be a good idea to close that card.
- High fees. It may be a good idea to cancel a credit card if there are high fees, such as late fees, annual fees, cash advance fees, or fees when you exceed your credit limit.
- Frequent excessive spending. If your balance keeps increasing and generating interest, canceling your card might be the smartest decision to avoid going into debt.
- Divorce or separation. If you had a joint credit card with a spouse or other loved one and you’re going through a breakup, closing your credit card could help keep your finances in order and prevent your future ex from making unauthorized purchases. desired on a joint card.
- Outstanding Debt. If you have unpaid debts that you are having trouble paying off, or if you are following a debt management plan that requires you to cancel your credit card accounts, it may be inevitable. While your credit will likely suffer, closing those accounts so you can focus on other debt payments could help you be successful in the long run.
If you can resist the temptation and avoid touching your credit card altogether, you can keep your card open while focusing on other debt or slowly paying off outstanding balances.
How to close a credit card the right way
If you need to cancel a credit card, you need to follow a procedure.
1. Pay your balance
To cancel your card, your balance must be paid in full. Otherwise, you will have to keep it open until the balance is zero.
2. Redeem all existing rewards
Any reward points you’ve earned using your card often disappear once you close a card. Depending on the card, you may be able to transfer your points to another card or cash back program. So take advantage of those reward points before you cancel.
3. Call the credit card company
To officially cancel, call your card’s bank number and talk to someone at the credit card company or the bank that issued that card. The customer service representative will most likely try to entice you with attractive offers to keep your card open. Stay strong and remember the reasons for closing your account.
4. For additional protection, send a cancellation letter
Although not required, send a certified letter to the credit card issuer stating that you have canceled your card. When you are on the phone with the customer service representative, ask them for the best address to send such a letter. And ask the issuer to confirm that your account has been paid in full.
5. Check your credit report
Before closing your card, check your credit report and look for any errors. You can order a free report every 12 months from each of the three credit bureaus – Equifax, Experian, and TransUnion – on AnnualCreditReport.com.
If you see any errors in your account history, such as payments mistakenly flagged as overdue or missed or payments flagged to the wrong account, you can file a dispute. The credit bureau has 30 days to review and respond to your dispute.
After closing your account, it is advisable to review your credit and watch for errors. Common mistakes that can appear after canceling a card include an account that appears to be open and active even after it is closed, or your credit report does not say “Closed by grantor.” It must be clear that the account has been closed by the creditor.
6. Dispose of your card safely
Once you have successfully closed your account, it is safe to dispose of the card. Destroy your card and make sure the number sequence is unrecognizable.
Alternatives to consider
If you don’t want to cancel your credit card and hurt your credit score, here are a few other options to consider:
- Negotiate for a lower rate. If a high APR prompts you to close your account, contact the card issuer and try to negotiate a lower interest rate. You will have more chances if you are in good standing.
- Downgrading to a card with no annual fee. Look for a card from the same issuer with no annual fee. Alternatively, you can try to trade with no annual fee for the same card.
- Transfer to a card with a zero APR introductory rate. To save money on interest, check out transfer the balance to a card with an introductory rate with zero APR. If you are able to pay off the balance before the introductory rate ends and the standard rate begins, it may be a good idea to complete the transfer. Note that there is often a balance transfer fee, which is a percentage of the amount you owe on the card. So you’ll want to do some basic math and look at the fees to see if it’s worth it.
- Keep the map open, but use it sparingly. If you want to keep it open, designate a specific use for it and use it occasionally. Set limits on how much balance you can keep, or try to pay it off in full each month. If you want to keep an active credit card but don’t intend to use it at all, inactive accounts can be closed by the creditor. To keep your account active, make a small purchase every now and then and pay off the balance.
Is Canceling Your Credit Card Wise?
It might be a good idea to cancel a credit card when it costs you too much or hurts your credit score in some other way. However, since canceling a credit card is usually bad for your credit, if you plan to close your card, you can do so in a way that minimizes the damage to your credit report. Weighing the pros and cons can help you make the best choice for your financial situation.