The average American who uses credit cards has 3.7 cards (source). How many cards do you have? Is it time to consider closing some of your credit card accounts?
May be it’s the high interest rate, or you just got one and never used later. What ever the reason, this article will answer some important questions around closing your credit card and help you find better ones that suit your needs.
How much does closing a credit card account hurt your credit score?
A recent survey asked respondents what factors would prevent them from canceling a credit card. Survey respondents cited these obstacles:
- Fear of hurting credit score (44 percent).
- Inability to pay off remaining card balance (26 percent).
- Unwillingness to lose hard-earned rewards (24 percent).
- Belief that the process of cancelling cards is too time-consuming (15 percent).
Closing a credit card account will have an impact on your credit score because it will affect two main factors that help determine your credit score in the first place. Those factors are the length of your credit history and your credit card utilization ratio.
A whopping 30 percent of your FICO score depends upon your credit card utilization ratio. Basically, this ratio represents the relationship of the balance you owe on your card to the credit limit you have on the card.
Your FICO score takes into account all the revolving credit you have when determining your credit card utilization ratio. Therefore, if you close a credit card account, your total credit limit will drop by the amount of credit you had on that card. That means that your credit card utilization ratio will rise. If it rises above 30 percent, your credit score will take a hit.
Closing a credit card account also affects your credit history, which accounts for another 15 percent of your FICO score. This is especially true when the card you close is one that you have had for a long time.
When is it a bad idea to cancel your credit card?
The simple answer is that it is almost always a bad idea to close a credit card account. This is primarily because of the effect it will have on your utilization ratio and your credit score.
But there are a few other reasons too. Closing a credit card is a permanent solution to what might only be a temporary problem. For instance, suppose that you are thinking of closing your credit card account because you are having trouble keeping your spending habits under control. In a case like that, it would be better to simply put your active credit card in an inaccessible place to avoid the temptation to use it.
Once a credit card account is closed, it may not be a simple matter of opening it again if you change your mind. Don’t make a hasty decision, carefully consider all your options before actually closing a credit card account.
Is it a good idea to cancel your credit card?
There are some rare occasions when it makes sense to close a credit card account. Here are some of those scenarios:
- When the account is new and closing it will have little effect on your credit score.
- When your credit card issuer changes the terms of your cardholder agreement, such as raising your interest rates, raising your annual fees, or changing a rewards program in an unsatisfactory way.
- When you never use the card and the credit limit is small.
- When you use the card too much and know that you cannot resist the temptation to overspend.
Are there options you can choose in lieu of closing your credit card account?
Before you make the final decision to close your credit card account, there are some options you should consider. If you want to close your account because you feel unsatisfied with the interest rates or because your annual fee is too high, you can try negotiating a better deal with your credit card company.
It is cheaper for the credit card company to keep a customer than to acquire a new one. So, your card issuer may be willing to work with you to keep your business, especially if your account is in good standing and if you have been a loyal customer for many years.
To negotiate a better rate or a waiver of the annual fees associated with your account, simply call the customer service number on your card and ask for what you want. In many cases, this is all that you have to do. In any event, it never hurts to ask.
To improve your chances of success, highlight all the reasons that the card issuer should keep your business. Mention factors such as how long you have been a loyal customer and how promptly you have paid your credit card bill each month. Don’t be shy about tooting your own horn to get what you want!
Steps to cancel a credit card, the right way
If, after careful consideration, you determine that you want to close your credit card account, here are the steps you need to take to get it done correctly:
1. Use up all your rewards points.
Typically, you forfeit any unused rewards points once you close your card account. So, do not leave money on the table by neglecting to use up those rewards points before you go.
SuperMoney bonus tip: If you are planning to apply for another card from the same credit card issuer, you may be able to transfer rewards points to the new card. Always check to see if this is an option.
2. Transfer any automatic payments to another card.
Before you close your current card account, be sure that you transfer any automatic payments taken from your account to another card you intend to keep open. A good practice here is to look back at your credit card statement for at least one entire year to be sure you catch all the automatic payments. Why a year? You likely remember the bills you pay each month, but there may be some annual bills lurking around that are easy to forget.
3. Pay off your balance in full.
It is possible to close your account without paying off your balance, but it is not a great idea to do so. Remember that your credit score depends on your credit card utilization ratio. If you close a card while still carrying a balance, your debt continues to show up on your credit report, but closing your account reduces your available credit. This will likely push your credit card utilization ratio above 30 percent, and your credit score will drop.
When possible, pay off your card balance in full before closing the account.
3. Alert authorized users.
It is important to ensure that you and all authorized users on your account are on the same page about closing the account. If you forget to tell one of your authorized users and that user tries to use the card, the merchant will decline the card or the card will be re-activated, depending on when the user attempts to make a purchase. You do not want either of those things to happen. So let your authorized users know when to stop using the card.
4. Continue to check your account for refunds and activity.
If possible, wait to close your account until processing of all purchases occurs. If you are anticipating any refunds for merchandise or you have any open disputed claims with merchants, you will need to keep checking your account even after you close it to ensure you catch any refund activity.
5. Call customer service to close your account.
You can make a request to close your account by calling the customer service number on the back of your credit card or on your credit card statement. Explain simply that you wish to close your account. Then, request an address where you can send a follow-up letter to confirm your request in writing. In your letter, ask the credit card issuer to send you written confirmation when the issuer closes the account.
6. Check your credit report.
Once you have followed all these steps, remember to check your credit report to ensure that the account shows up as closed. If the account is not reported as closed, contact the card issuer to request proper reporting. That is usually sufficient.
If your card issuer fails to report your account as closed within what you consider a reasonable amount of time, you can alert the credit bureau of the discrepancy.
How can you find a new credit card that better suits your needs?
When you close a credit card because of dissatisfaction with an annual fee or high APR, you can search for a better card right here. Also, check out our guide on how to find the best credit card for you here. May be you made a bad decision with your current credit card, but you can get a better one, this time.
SuperMoney enables you to weigh your options, check the best offers and read what other cardholders have to say about their experiences with credit cards through hundreds of user reviews.