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Credit cards are useful tool for streamlining your monthly bill payments, earning rewards or paying for things when you can’t use cash or debit. At some point, however, you may decide that a particular card is no longer working for you and it’s time to cancel it.
Cancelling a credit card involves more than paying it off and putting it away. Cutting it into tiny pieces with sharp scissors may feel wonderful, but there’s more to cancelling the account than that satisfying ceremony. Cancelling a credit card can impact your credit score so it pays to be aware of the consequences before you pull the trigger. Read on to learn how to cancel a credit card the right way and what you can expect during and after the process.
How to cancel a credit card
Before you cancel a credit card, you should first cancel any recurring charges or payments associated with the account. If, for example, you’ve got automatic payments set up for your electric bill or gym membership, you’d want to reroute them to another card or your checking account so you’re not in danger of falling behind.
Next, check the status of any rewards you’ve earned with the card, if applicable. Make sure you cash in on your benefits before you lose the chance.
Ask about how much time (if any) you have to use accumulated rewards. In many cases, your rewards remain available for use indefinitely, especially if you continue to have rewards activity without using the credit card (as is the case when you earn airline miles for flying). In other cases, cancelling the credit card associated with your rewards wipes them out immediately. Lots of card issuers maintain both types of programs.
If you don’t plan to use the rewards right away and don’t want to lose them completely, look into other options like points transfer or cash back. Some programs will let you move your points to one of their travel partners, and others let you redeem points for cash or a statement credit.
For example, some rewards programs may allow you to redeem for cash back into your savings account or checking account. This type of transfer may take a few days, so pay attention to the fine print and wait to cancel any card until after points transfers are complete. Some accounts allow points transfer to partner airlines but this is a benefit that depends on the card the points are linked to, so be sure you understand the process with your particular card, and again make sure any point transfer has been completed.
Finally, contact the credit card company and explain why you want to cancel your account. You can do this by mail but over the phone is usually the fastest way to get the job done. Be aware that the credit card company will probably offer you an incentive to keep the account open, such as waiving the annual fee or reducing your interest rate. If you’ve made up your mind that you no longer need the card, be firm.
Take a few minutes to write the credit card issuer a letter confirming your wish to cancel your credit card. You can find their physical mailing address on the last statement. Include your full legal name, your current address, and the last four digits of the credit card account number. State that you wish to cancel the card and note the date you placed the cancellation call to customer service. Be sure to request that the card issuer reports your account as closed by the cardholder.
Keep a copy of your letter and any confirmation they send you together in case there is mix up down the road or the account isn’t properly reported to the credit bureaus.
Does your credit card have a balance?
If the card has no balance, verify that. This step requires a phone call to the card issuer’s customer service department. Use the contact number on the back of the card. Have a recent statement handy, and be prepared to answer a few identification questions that will authorize the customer service representative to speak freely about the account status.
You can close an account that has a balance. It might or might not affect your debt utilization ratio, depending on how it’s reported. If the balance and limit are both reported, the account will be included in your ratio. If the limit is not reported, the balance will not count toward your overall utilization ratio. If the creditor reports your limit as equal to your balance (common for closed accounts), utilization will be 100% on that card and your credit score will suffer.
If the account is closed with a zero balance, its former credit limit does not count toward your overall utilization ratio. A closed account will continue to affect your credit score in other ways (average file age, credit mix, positive payment history, late payments) for up to ten years.
Check your credit report
It may take 30 days or longer, but Experian, TransUnion, and Equifax should update the status of your cancelled credit card within two months. Look for a note on the account confirming that the account was cancelled at your request.
Dispute any discrepancies in your credit files if they don’t clear up by the second reporting cycle. Disputing incorrect information is your right under the Fair Credit Reporting Act.
How to cancel a credit card online
If you don’t want to get tied up on the phone with customer service, you may be able to cancel a credit card online. Check to see if your credit card company has a secure online chat or message center. If so, you should be able to connect with a representative virtually and request that your account be closed.
You may need to login to your online account first or provide information to verify your identity but all in all, this is a relatively painless way to cancel a credit card. Don’t be surprised if your credit card issuer requires a phone call to close an account. Remember, they want to inspire you to keep it open.
How to cancel a credit card for a joint account
If you’re the primary card holder on a credit account that you share with someone else, you can cancel it at any time without the other person’s consent by contacting the credit card company. Just remember that cancelling the account doesn’t eliminate your obligation to pay any balance remaining on the card. On an account that has one or more authorized users, the primary card holder is solely liable for any debt owed on the card.
If the account is jointly owned, both parties are responsible to pay the debt. But if one decides not to pay his/her portion, both peoples’ credit will suffer.
What happens when you cancel a credit card?
Cancelling a credit card means that you can no longer use it to make purchases. Cancelling a card has more far-reaching implications for your credit.
File age
Closing an account will not negatively affect your average file age in the near future, but will eventually. The ages of your accounts are reported to the credit bureaus and factor into your score (the oldest account, the newest account, and the average age of all of your accounts). This information makes up 15% of your FICO score.
Longer credit histories look better to credit reporting agencies and have a better overall effect on your score. Consumers with top credit scores tend to have an average account age of 20-25 years or longer. When you open new accounts, your average account age comes down. Keeping the oldest accounts in your file open and active can help you maintain a healthy credit score, so consider the account’s age when you decide whether or not to cancel a credit card. You’ll still benefit from the account’s age until it is removed from your credit file.
Payment history
Positive information associated with open lines of credit remain active and visible on your credit report as long as the account is active. When you close an account the clock starts on a ten-year time period during which you’ll still have the benefit of a good payment history on your report. When the ten years is up that information and its positive effect on your FICO score disappears forever.
Negative information like missed payments, foreclosures, and accounts sent to collections must be removed from your credit file seven years after the date of delinquency.
Under the newest FICO score rules, accounts turned over to a collection agency and then paid won’t hurt your score. So if your credit card account is in collection, it may be in your best interest to pay it off.
Utilization
Closing an account affects your utilization ratio if you owe balances. Your credit utilization ratio is the amount you owe in relation to the total amount of credit available to you, and this ratio has a very big effect on your credit score (30%). We know from examining Credit Sesame’s 8-million-member strong member database that people with great scores keep their balances to no more than 30% of the total available credit limit, and even lower is better. Consumers with the very highest scores tend to use no more than 7% of their available credit.
When you no longer have the available credit on the account you’re closing, your utilization goes up (not good) if you still carry balances on other cards. Paying down your debts or asking for a credit line increase on your other credit cards can help to offset some of the damage. If you don’t owe money on any other revolving credit account, cancelling a card won’t affect your utilization (it’s already zero).
To many lenders, credit utilization ratios matter as much or more than the amount of overall debt you carry. A person with $2,000 of total available credit with a consistent payment history and 10% credit utilization may have a higher score and look like a lower risk than a person with $100,000 of available credit but 50% credit utilization.
To illustrate how closing a card affects utilization, imagine you’ve had a travel credit card for five years with an annual fee of, for the sake of the example here, $95 annual fee. You have two other cards with travel rewards that don’t impose an annual fee and their combined credit limit of $20,000 is more than enough to cover your needs. You owe a total of $10,000 on those two cards.
You haven’t used the annual fee card in three years and it has a $5,000 credit limit. The $95 annual fee is painful since you aren’t offsetting it with travel rewards like you had planned, and this card has the highest variable APR of the three cards in your credit file. It’s only natural to wonder if cancelling it will hurt your FICO score.
Because you owe $10,000 on the other two cards, cancelling the unused credit card with a $5,000 limit will decrease your total available credit from $15,000 to $10,000; your utilization rate will rise from 40% to 50%, even though you have a $0 balance on the card you want to cancel. Your score will probably drop until you bring the utilization ratio down.
If you want to close a card but can’t pay off existing balances, ask for credit limit increases on your other cards to make up for the unused credit that will disappear. Just remember that when you ask for an increase, the issuer will usually check your credit, and that, too, will temporarily ding your score.
Credit mix
The variety of credit accounts you hold is another factor the credit bureaus consider, and it makes up about 10% of your score. If you hold a mortgage, an auto loan, a student loan and a credit card, you will probably gain more points in the credit mix category than someone who only has one type of credit account. For this reason, it may not be in your best interest to cancel your only credit card.
Is it bad to cancel a credit card?
Cleaning up your credit file by closing unused cards might be your best move. If the unused credit or a sky-high limit tempts you to take a spur-of-the-moment shopping spree or plan an expensive vacation, then it’s a great idea, from a financial standpoint, to get rid of the card right away. The damage done by taking on debt you can’t afford will far outweigh the impact of closing the card and potentially taking a hit to your FICO score.
Should I cancel my credit card?
Whether or not you should cancel a credit card depends on a few different factors. If you’re stuck paying a high annual fee for a rewards card that you rarely use, for example, the card is likely costing you more money than it’s saving you. If the card issuer is unwilling to waive or reduce the fee, cancelling it may be your best option.
Cancelling a credit card also makes sense if you’re not able to keep your spending in check and you’ve gotten in over your head with debt. In that scenario, closing accounts may help you keep your financial situation from getting worse.
If you want to tidy up your finances and get rid of accounts you no longer use, just weigh the consequences in light of your financial plans. You don’t want to do anything that might cause your score to dip if you’re planning to apply for a mortgage or other large financing in the near future. A lower score could affect your interest rate you’ll pay, and even your ability to get approved.
For example, let’s say you have a 680 credit score and you want a $250,000 loan to buy a home. With a score in that range, you could be looking at an interest rate of 4.3%. You decide to cancel a credit card a month before applying for a mortgage, however, which sends your utilization ratio up and knocks your score down to 649.
When you apply for the mortgage, the best deal you can find is 4.8%, which adds roughly $27,000 to the total amount of interest you’ll pay over the life of the loan.
Alternatives to cancelling a credit card
If the annual fee is a sticking point for you, but you enjoy the benefits of a particular card, it’s probably worth checking with the issuer to see if they’ll waive the fee for a year.
Look at it this way; it costs a credit card company a lot more to gain a new customer than it does to keep a current customer. For this reason, customer service representatives are often given the ability to waive fees when asked. Banks understand that long-term customers are likely to use the card eventually, even if infrequently, so it’s worth it for them to try to keep you around.
Call customer service and tell them that you like the card, but the annual fee is a problem for you at this point. Tell them you are considering cancelling the card but you’d like some time to decide. They may offer you a retention bonus like extra miles or points, they may waive the fee for a year, or they may tell you they are sorry to see you go. In any case, it’s worth a simple phone call to learn about your options.
In the event that you are able to negotiate a free year, be sure to schedule a reminder a few weeks before the next time the annual fee is due so you can reevaluate the card and make the best decision about whether you want to continue using it.
Downgrading your card to a version that doesn’t have the same fees associated with it is another alternative to cancelling a credit card. If the annual fee is your biggest reason for wanting to ditch the card, you may be able to hang on to your available credit and keep your credit history with the account intact by taking a step down to a lower tier on the bank’s line of credit cards. Again, credit card companies hate to lose established customers, so it’s a good idea to make the inquiry before deciding to cancel the card.
Make good decisions to maintain great credit
Before you cancel any line of credit, think about the effect your actions may have on your credit score. For some consumers, losing a few points is a fair trade for keeping debt in check or saving money on annual fees. On the other hand, people who want to apply for a mortgage or car loan in the near future may not want to risk even a small dip in their FICO score. Protect your credit score by understanding all of the options, risks, and rewards associated with terminating your relationship with a card issuer.
Checking your credit can give you some insight into how much of an impact the account closure has on your score. Sign up for Credit Sesame’s free credit monitoring service to keep tabs on your credit standing from month to month.
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