The Smart Way To Cancel A Credit Card

The Smart Way To Cancel A Credit Card

Kim Pinnelli

by Kim Pinnelli
Senior Contributing Writer

November 28, 2020
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The Smart Way To Cancel A Credit Card

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If you want to cancel a credit card, it means more than not using it or cutting it up into unrecognizable pieces.

Closing a credit card account isn't a good idea in most scenarios. Its negative impact may cause more damage than good. But there are a few situations when it may be an appropriate course of action.

If you decide you should cancel a credit card, you must take specific steps to limit the damage. It's essential to understand what happens when canceling a credit card, how it affects your credit, and most importantly, what you need to do to make sure you don't feel the backlash of doing it incorrectly.

When Should you Close a Credit Card?

Despite the short-term negative impacts, you'll likely be better off in the long run if your situation matches any of the following:

  • You have a high annual fee. Sometimes people sign up for credit cards with an annual fee (often waived for the first year) because of the benefits, such as travel rewards (most common with American Express cards). If you're no longer using the travel rewards, or the intro period has ended, you should ask yourself: is that high fee worth it?
  • You have a secured credit card that you don't need. If you've improved your credit and have an unsecured credit card now, you can get your security deposit back if you close the card.
  • You can't handle the temptation of carrying a credit card and always have credit card debt. Some people can't help but spend money if they know they have available credit. If locking it up or giving it to a trusted family member doesn't work, you'll save money in interest fees in the long run if you cancel it.

When Shouldn't you Close a Credit Card?

Don't close a credit card just because you don't use it. If it doesn't have an annual fee or the credit card issuer isn't holding a security deposit leave it, unless you can't control your spending.

If you can lock it up or just leave the account open and it doesn't cost you any money, you should leave it open. Your FICO score will thank you!

What Effect Does Closing a Credit Card Have on your Credit?

Closing a credit card may hurt your credit in three areas:

  • Payment history. Your payment history makes up 35% of your credit score. Making your credit card payments on time helps increase your credit score. If you don't have many other debts, you won't get the 'good credit' from making your payments on time if you close your credit card.
  • Credit utilization rate. Your credit utilization rate (or ratio) compares your amount of credit outstanding to your total available credit. If you have more than 30% of your total credit lines outstanding, it hurts your credit score. Your credit utilization ratio is 30% of your credit score.
  • Length of credit history. Your length of credit history (credit age) makes up 15% of your credit score. The credit bureaus average the total credit age of all accounts. Closing an account will decrease your credit age, hurting your credit score.

If canceling your credit card will hurt your credit score for any of these reasons, leave it open.

If It's Better to Leave a Credit Card Open, What Should you Do?

If canceling your credit card will hurt your credit score for any of the above reasons, leave it open. You don't have to use it (and probably shouldn't) if you have a high utilization rate or can't pay the bill in full.

Instead, lock your credit card up in a safe place. But, use it once every few months. If you don't use it, the credit card company may stop reporting it to the credit bureaus due to inactivity. Some credit card companies even cancel your card after 12 to 24 months of no use.

Instead, use it to purchase something you'd typically buy (groceries, a household bill, etc.) and pay it off before the due date. You get a good payment history, keep your utilization rate down, and keep your length of credit history.

If It's Better to Cancel, Take These Steps

If you have legitimate reasons to cancel your credit cards, take these steps:

  1. Pay the balance in full. You can't close a credit card with a balance for obvious reasons. If you can't pay off your balance in full, consider applying for a 0% APR balance transfer credit card and transferring the balance.
  2. Use Up The Rewards. You'll almost certainly lose any rewards you don't use once you've closed the credit card. Some credit card companies let you transfer the points to another card or use other redemption methods. Read your credit card agreement or call the credit card company to find out what options you have.
  3. Cancel automatic payments. If you have any bills set up for automatic payment, take them off "autopilot" before you cancel your card. Look at your credit card statements from the last year, so don't miss anything – those pesky annual charges you may forget about will incur late charges or cancelation if you forget about them.
  4. Call customer service to close the account. Here's where you need to be strong. The bank's retention team will try to get you to keep the card – they may offer a lower APR or waive the annual fee. They'll try anything to keep you as a customer. Unless they offer something that addresses why you want to cancel, don't let them talk you out of it!
  5. Check your credit report. After 30 days, check your credit report and verify the credit card company closed your credit card. If the line of credit is still listed as open, follow up with them right away. Mistakes happen, and your credit report is at stake, so don't assume it's done until you've confirmed it.

Should you Close a Credit Card?

Think carefully before deciding to close a credit card and how it will impact your personal finances. If you close one card because of the annual fee, you may want to replace it with a card with a similar credit line with no annual fee. You'll keep your credit utilization rate about the same and take only a small hit for the lower credit history length.