One would think that canceling a credit card would look good on your credit report. You’ve got less available credit, and therefore less of a chance to get into overwhelming debt.
However, cancelling a credit card the wrong way can, in fact, damage your credit score.
We’re going to talk about how to cancel a credit card safely and show you how to do so in a way that won’t hurt your credit rating.
Table of Contents
- How Cancelling a Credit Card Can Affect Your Credit
- How to Cancel a Credit Card the Right Way
- 1. Redeem Any Rewards
- 2. Pay Off Any Outstanding Balance
- 3. Call and Ask to Have the Account Closed
- 4. Check Your Credit Report to See That it’s Been Closed
- Reasons You May Want to Cancel a Credit Card
- High Annual Fees or Interest Rates
- Separation or Divorce
- Too Many Open Accounts
- You Want to Be Done with Credit Cards
How Cancelling a Credit Card Can Affect Your Credit
When talking about how to cancel a credit card safely, you might be wondering what the big deal is. After all, it’s not like the issuing bank of said credit card will hunt you down, forcing you to use the card “or else.”
However, canceling a credit card the wrong way can hurt your credit score. In addition, it can cost you money (more on that below).
Your Credit Utilization Ratio
A Credit Utilization Ratio (CUR) is a number that influences your credit score. Your personal credit utilization ratio is determined by dividing the amount of credit card debt you have by the total available credit you have.
For instance, if your credit card limits total $20,000 and you have credit card balances totaling $10,000, you have a credit utilization ratio of 50%.
If you use that same scenario and pay those credit card balances down to $5,000, your credit utilization ratio drops down to 25%.
Credit reporting agencies like to see a person’s credit utilization ratio at 30% or less.
Now, let’s take that same scenario assuming you’ve got the $5,000 in credit card debt and $20,000 of total credit card limits. Your CUR is 25%.
However, if you close a credit card with a $10,000 limit and are left with $10,000 in total credit card limits, your CUR will then rise to 50%.
And that leaves a potential to drop your credit score because it looks like you’re using a larger portion of your available credit, when, in fact, your credit card balances have remained the same.
Your Payment History
Another way closing a credit card in a risky manner can hurt you pertains to your payment history. If the credit card you’re considering closing is one that you’ve held for many years, a good payment history on the card is a factor in your good credit score.
However, if you close that card and are only left with cards that haven’t been opened for very long, it can appear as if your credit usage history is shorter than it actually is.
This too can lower your credit score.
How to Cancel a Credit Card the Right Way
Cancelling a credit card the right way isn’t difficult as long as you know what steps to take in which order. Here’s a suggestion on how to do that.
1. Redeem Any Rewards
This is one way closing a credit card the wrong way can cost you money. If you’ve got outstanding rewards on the credit card you want to close, and you don’t use them before you close, there’s a good chance those rewards will be forfeited.
You can always call the credit card company or check online terms to find out if you will indeed forfeit your rewards if you close your account before using them.
Our suggestion is simply to use the rewards and eliminate that possibility. Find out if the credit card company will cut you a check or what the procedure is to get your rewards balance.
Then follow those procedures before you close the card. If you have to wait for a certain timeline to be met before you can get your rewards, explain your situation and ask if you can get them early because you want to close the card.
If the credit card company refuses to issue your rewards early, you may want to wait on closing the card until you can redeem the rewards and get your cash.
2. Pay Off Any Outstanding Balance
After you’ve taken care of getting any rewards, it’s a good idea to pay off the card in full. This isn’t required but it’s a good idea since once you close the account the bank has no reason to extend any courtesies, such as waiving a fee or lowering your interest rate.
First, call the credit card company to get the current payoff amount. Don’t go off your most recent credit card statement or your online balance as there can be interest that is due but not yet applied to that balance.
Therefore, call and get the payoff balance and find out what date it is good through. Then pay the balance in full before the specified due date.
That way you eliminate any possibility of closing a card and leaving an unpaid balance that could affect your credit unbeknownst to you.
3. Call and Ask to Have the Account Closed
After you’ve redeemed your rewards and paid the card in full, you’ll want to call the credit card service center and ask to have the card closed.
Call the number on the back of the credit card for guidance. If you don’t have the card, you can find the number on your statement or online.
During your call, be sure to ask the credit card company if they’ll mail out a verification letter regarding the card closing. Some companies might not do that, but most will.
4. Check Your Credit Report to See That it’s Been Closed
About six weeks or so after you’ve closed the account, you’ll want to check your credit report to ensure the card was indeed closed.
Although you typically have to pay to get a copy of your credit report, there are a few ways you can check your credit report for free each year.
When you’ve gotten your report, check and see that the account for the card you’ve closed does indeed reflect that it’s closed. Doing so will help prevent any fraudulent activity on the card in the future.
So, should you leave all of your credit cards open or should you cancel some of them? What are some reasons you may want to cancel a credit card?
Reasons You May Want to Cancel a Credit Card
While closing credit cards may negatively affect your credit, there are some instances in which you may want to close a credit card account. Here are a few of the more common reasons for doing so.
High Annual Fees or Interest Rates
Some credit cards are simply not a good deal from a financial standpoint. Maybe there’s an annual fee on the credit cards and you know you can get other credit cards without an annual fee.
Or maybe the interest rate on the card is just too high. There are plenty of credit cards out there with low or introductory interest rates that are better than high interest cards.
Maybe you want to trade in your current card for a credit card with a better cash back program. Closing a credit card to get one with better financial incentives can be a good idea.
Here’s a list of the best cash back cards.
Separation or Divorce
If you’ve recently separated or gotten a divorce, you may want to close credit cards that are in joint ownership with your ex or soon-to-be ex-spouse. Having a credit card with someone you’re no longer in a relationship in can be risky.
One party might choose to wrack up more debt on the card, leaving the other equally responsible for paying that debt off. Consider closing the card before that can happen.
Too Many Open Accounts
Or maybe you simply feel you have too many open credit card accounts. It can be good to have a few open credit card accounts, even if you’re not using them.
However, the more credit accounts you have open, the higher your risk for fraud. After all, credit card fraud is a real thing. There’s always a chance an unscrupulous person can obtain the credit card number and use the account.
If that’s a concern to you, you may want to close some accounts so there are not too many open in your name.
You Want to Be Done with Credit Cards
Or maybe you just want to be done having and using credit cards. Let’s say you’ve recently joined the 1% club.
Or you’re successfully working the money habits needed to become wealthy. You’ve paid off your debt and you’ve got a plush emergency fund.
Retirement savings goals are in full swing and you’ve got a decent-sized taxable investment account. You just don’t have a need for credit cards any longer.
If that’s the case, you may decide it’s time to close one or more of your credit cards. You may want to leave at least one open for things like airplane reservations, but you’ve decided the rest can go.
If so, follow the guidelines above to get them closed.
Closing a credit card the wrong way can hurt your credit and potentially cost you money. However, following the steps above to close an account the right way is easy.
Be sure to use the guide above when closing credit cards so that you can do so in a way that preserves your credit score and your money.