The average American who uses credit cards has 3.7 cards (source). Why? Because different cards offer different advantages (and more credit). If you decide that you no longer want or need one of your credit cards, you may consider closing your account. But how do you cancel a credit card, and is it a good idea?
In this article, we’ll share all you need to know about canceling a credit card. Plus, learn how to find a better replacement card.
How to cancel a credit card in 6 steps
If, after careful consideration, you determine that canceling a credit card is the best move for you, here are the steps you should take.
1. Use up all your rewards points
Typically, when it comes to closing a rewards card, you forfeit any unused rewards points once you close the account. So, don’t leave money on the table by neglecting to use up those rewards points before you go.
SuperMoney bonus tip: If you are planning on canceling a credit card with a card issuer, like Capital One, but intend on applying for another card with them, 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
If you use your credit card to pay bills and have automatic payments set up, be sure you link the bills to another card or a checking account with your bank before you close the account. A good practice here is to look back at your credit card statement and review your payment history 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 statement balance in full
Canceling a card without paying off your credit card balance is possible, but it’s not a great idea. Remember that your credit score depends on your credit utilization rate. If you close a card while still carrying a balance, your debt continues to show up on your credit report while closing your total available credit drops. This will push your credit utilization rate up, and your credit score will drop.
For example, say you have $5,000 in outstanding credit card debt and $8,500 total available credit. Your credit utilization ratio would be 58%. If you close a credit card with an outstanding balance of $1,000 and a total credit line of $2,000, your credit card debt would still be $5,000, but your total available credit would drop to $6,500. That means your credit utilization rate would jump up to almost 77%. However, if you paid off the $1,000 balance, the credit utilization would only increase to 61%. This can make a big difference in the number of points you lose from your credit scores.
The bottom line? When possible, make sure you pay off your account so your balance is zero before closing the account.
3. Alert authorized users
It’s important to make sure that you and all authorized users on your account are on the same page about closing the account. If you forget to tell a user and they try to use the card, the merchant will decline the card. Further, some credit card companies will reactivate it, depending on when the user attempts to make the purchase. You don’t 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 the processing of all pending 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 request to close your account by calling the customer service number on the back of your credit card or your credit card statement. Explain 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, make sure to 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, you should receive a confirmation email or letter from the company. However, also remember to check your credit report to ensure that the account shows up as closed. If it doesn’t, contact the card issuer to request proper reporting. That is usually sufficient.
If your account doesn’t show as closed on your credit report within two months, you can alert the credit bureaus of the discrepancy. If it does, you’ll be able to see the impact the closure had on your credit scores.
How much does closing a credit card hurt your credit scores?
A recent survey asked respondents what factors would prevent them from canceling a card. Survey respondents cited these obstacles:
- Credit score damage (44 percent).
- Inability to pay off remaining card balance (26 percent).
- Unwillingness to lose hard-earned rewards (24 percent).
- The belief that the process of canceling cards is too time-consuming (15 percent).
Closing a credit card will impact your credit scores because it affects two main factors that help determine your scores in the first place. Those factors are the length of your credit history and your credit utilization rate.
A whopping 30 percent of your FICO score depends upon your credit card utilization ratio. Basically, this ratio represents the relationship of the credit card balances you owe on your cards to the credit limits you have on those accounts.
Your credit scores consider all the revolving credit you have when determining your credit card utilization ratio. Therefore, if you close a credit card, 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. The higher it is, the lower your score will drop.
Canceling your 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. Being so, it’s important to take your credit profile into consideration when making this decision. There are many ways to check your credit report, including requesting a free copy of each of your credit reports once per year from AnnualCreditReport.com.
When is it a bad idea to cancel your credit card?
If you want to cancel a credit card, the simple answer is that credit card account closure is almost always a bad idea. 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 someone. For instance, suppose that you are thinking of closing your credit card account because you are having trouble keeping your debt under control. Instead, you may be able to simply put your active credit card in an inaccessible place to avoid the temptation to use it.
If the annual fee is too high, you may be able to negotiate new terms with your card issuer.
Remember, closing a card can’t always be easily reversed. It’s wise to carefully consider all your options and the consequences before actually closing a credit card.
Is it a good idea to cancel your credit card?
Here are some rare occasions when it can make sense to close a credit card:
- When the account is new and closing it will have little effect on your credit score.
- When your bank or credit card issuer changes the terms of your cardholder agreement, such as raising your interest rates, raising your annual fee, or changing a rewards program in an unsatisfactory way.
- When it’s a card you don’t use, and the credit limit is small.
- When you use the card too much and know that you cannot resist the temptation to rack up debt.
In these situations, it may be best to go ahead and close an account.
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 bank or credit card company.
It is typically cheaper for credit card issuers 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 fee associated with your account, 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 cards each month. Don’t be shy about tooting your own horn to get what you want!
How can you find a new credit card that better suits your needs?
When you want to cancel a credit card because of dissatisfaction with an annual fee or interest rate, you can search for a better card right here. Also, check out our guide where we share how to find the best credit card for you here.
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Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.