When Canceling A Credit Card Makes Sense
There are a few situations in which it may make sense to cancel a credit card. For example, if:
- The card has a high annual fee and the benefits aren’t worth it to you
- The interest rate on the card is high and you need to carry a balance
- You are struggling to manage your debt load and are having trouble resisting the temptation of living beyond your means with the card
- You want to get rid of a bare-bones card, like a student card or secured card, in exchange for a regular or rewards card
Closing An Unused Credit Card Without Hurting Your Score
Depending on your situation, you may be able to close an unused without impacting your credit score. For example, if you have multiple credit cards with the same issuer, they may let you transfer your balance from a closed card over to your remaining card.
Consider this hypothetical: You have two credit cards with the same issuer, one with no annual fee and a $3,000 credit limit, and one with an annual fee and a $5,000 credit limit. You want to close the card with the annual fee to save money. You can request that your issuer transfer the $5,000 credit limit to your other card before closing the account. That way you end up with a single credit card with an $8,000 limit.
Transferring your credit limit to another card conserves your total available credit, which keeps your utilization rate the same. So long as the card you close isnt one of your oldest accounts, this can help your credit score remain the same after you close an unused credit card.
That being said, if the main reason youre thinking of closing an unused credit card is the annual fee, you may have other options. First, try negotiating with your issuer to waive the annual fee. Depending on how long youve had the account and how much the issuer wants to keep your business you may get a waived or reduced annual fee.
How Closing A Card Can Hurt Your Credit
Any credit card thats reported to the credit bureaus is factored into your credit score. That means how you handle the card plays a role in how your credit score moves. Closing a credit card can affect your credit score in a few key ways, and unfortunately the impact is rarely positive.
Your credit utilization rate can go up. When you close a credit card, particularly one that has a balance, the credit limit is no longer factored into your credit score, so your can shoot up immediately. Your credit utilization ratio measures how much of your total available credit youre using. Credit utilization is based on overall credit available used across all cards and also on a per-credit card basis. If you lose some available credit but carry the same amount of debt, your ratio will go up. Because utilization makes up 30% of your score, this is an important factor to watch.
Even closing a credit card with a zero balance can affect your overall credit utilization if youre carrying balances on your other credit cards.
Youll have one fewer open account on your credit report. If you dont have many other credit cards or loans, this could leave you with a thin credit file, meaning that theres not enough information for a creditor to evaluate.
Closing a credit card doesnt remove it from your credit report. Any negative payment history associated with the account will be reported for seven years from the date of the delinquency.
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How To Properly Close A Credit Card
Still determined to close an account or three? Your commitment to a course of action is commendable so long as you do it properly.
- Do you have a balance? Pay it off. If you cant manage that, develop a plan with the card issuer to do so.
- Are you closing a rewards card? Spend your points or miles before you shut it down. You earned them, after all.
- If youre closing accounts simply because you have too many, review whether closing newer accounts is to your advantage. By shedding newer accounts, you might actually boost your average account age and your FICO score.
- Contact the issuers customer service department to let them know you intend to cancel the card. They may offer lower interest rates or enrollment in a no-fee rewards program.
- Make a record of your request by following up in writing. Use the customer message center on the issuers website, or follow the instructions on its Contact Us link. Watch for a response.
- Make sure the account is closed after some time passes and destroy the card, as well as all evidence of it on your internet shopping accounts.
Again, the decision to shut down credit card accounts even those you never use must not be taken lightly. You very likely will damage your FICO score, which may be precisely what youre attempting to avoid.
If temptation is your weakness, review the alternatives above. There are smart ways to subdue your bad spending habits short of cutting off your access to credit.
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How Your Credit Score Is Determined
Your credit score is a number that represents your creditworthiness and is typically impacted by:
- your payment history
- your credit utilization ratethe total of all outstanding balances you currently owe compared to your total credit limits
- the length of your credit history and the average age of your accounts
- whether youve applied for multiple new credit accounts recently
- your mix of credit
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The Card Has A High Annual Fee
If your card has an expensive annual fee and you don’t use the rewards, it may be worth closing the card. Before you do, remember that you may lose the rewards you currently are eligible for. As an alternative, find out if the card issuer can transfer your account to a different card that doesn’t carry a fee. This lets you keep the account open while avoiding the annual fee.
Get A Higher Limit With An Unsecured Card
Unsecured credit cards, also called traditional credit cards, are better for long-term use than secured cards because they don’t require a deposit and they typically offer a higher line of credit. You can also earn rewards on purchases like groceries and gas, earn cash back and travel for free. Unsecured cards also come with additional perks for cardholders, such as travel insurance and purchase protection.
After using your secured card consistently and paying your bills on-time and in full, you’ll know it’s time to move on to an unsecured card when your credit score improves and you’re ready for a higher limit. To help you decide which path to take, we review both scenarios below.
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Contact Your Credit Card Issuer
Once youve cleared out your balance and your rewards, its time to contact your credit card issuer. Call the number on the back of your credit card, confirm that your current credit card balance is $0 and request to cancel your account.
The customer service representative may offer you an incentive to keep the account opena lower APR, for example, or the opportunity to earn bonus rewards. Other representatives may simply pressure you to keep the account open. You can decide whether to accept any incentives you are offered, but dont let yourself be talked into keeping a credit card that youd rather cancel.
How To Cancel A Credit Card: 6 Steps
Let’s say you do decide that closing the account is the best move. Here are six simple tips to help you navigate the process:
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Ways Cancelling A Credit Card Could Improve Your Credit Score
In general, your credit score is improved when you reduce some of the potential risks for lenders. So, if cancelling a credit card leads to any of the following changes, it could have a positive impact on your score:
- If it gets rid of a high credit limit. Having access to a lot of credit can hurt your credit score because it increases the risk that any new lenders would face if you applied for another card or loan. By cancelling your credit card, youll reduce this risk, which could also improve your credit score.
- If it shows youve settled outstanding payments. Before you can close a credit card account, youll need to make sure the balance is cleared. So, if you have previously had late payments or defaults recorded on this account, closing it could show youre taking control of your debts.
- If it helps you make other payments on time. Once youve closed your credit card account, youll have one less bill to think about each month. If this makes it easier to deal with other accounts, it could improve your payment history and your credit score.
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When To Close A Credit Card
To reiterate: All things being equal, its best to keep accounts open. This is not to say there arent situations where selectively shutting them down makes sense.
Those situations include:
- Youre getting divorced and you share accounts with your future ex-spouse.
If your trigger is/are high annual fees and/or high interest rates, check with the issuer about keeping your account open with a low- or no-fee option most awards cards have them and/or reducing your interest rate. Explain that if you cant come to an accommodation, youll have to close the account. Most companies want to keep your business.
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How Closing A Credit Card Account May Impact Credit Scores
Reading time: 2 minutes
Closing a credit card could change your debt to credit utilization ratio, which may impact credit scores
Closing a credit card account youve had for a long time may impact the length of your credit history
Paid-off credit cards that arent used for a certain period of time may be closed by the lender
Youve paid off your credit card, and youre wondering if you should close the account – and whether that might impact your credit scores, for better or worse. The answer depends on your unique credit situation.
Before you close a credit card account, consider the following:
- Closing a credit card could lower the amount of overall credit you have versus the amount of credit you’re using , which could impact your credit scores. You can calculate your debt to credit utilization ratio by adding all your available credit and all the debt you owe on those accounts. Divide the total debt by the total available credit. Creditors and lenders like to see a lower ratio of how much debt you have compared with how much available credit you have.
- Closing a credit card account youve had for a long time may impact the length of your credit history, which is another factor generally used to calculate credit scores. In general, creditors like to see youve been able to properly handle credit accounts over a period of time.
- If you have a paid-off credit card you haven’t used in a certain period of time, it may be declared inactive and closed by the lender.
Does Closing A Credit Card Account Hurt Your Credit Score
When I was younger, I tried to close my unused credit card accounts to boost my credit score. I never carried a balance, but I thought if I had too many credit cards, I wouldnt be eligible for new lines of credit. Years later, I discovered this belief was misguided, and that the truth was far more complicated.
To understand how closing a credit card account can hurt your credit score, it helps to know how the score is calculated. Companies used to review your credit history to determine your creditworthiness, and then decide whether or not to grant you a line of credit. Today, the credit bureaus have boiled your credit history down to a single number, the credit score.
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Check Your Credit Before Closing An Account
Closing a credit card account can make sense in certain circumstances, but it’s important to understand that it can adversely affect your credit score. Before your close your account, consider taking a look at your to see where you stand and make sure that closing the account won’t leave you with a credit history that’s too thin or too new. While the negative effects of closing a credit card account are usually temporary, it might be worth keeping a long-standing account open if you’re able to.
Switching From A Securedcredit Card To An Unsecured Card
Perhaps your credit score went up to the point where you cannow qualify for an unsecured credit card. Congrats!
But instead of closing your account, consider staying with the same credit card company and simply upgrading from your secured credit card . This is a good alternative to closing a credit card because upgrading to a secured card with the same issuer allows you to keep your account history.
Its best to try to change your spending habits before closing your account.
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Reasons You Shouldnt Close A Credit Card
Is closing a credit card going to majorly damage your credit score? Not necessarily, but that doesnt mean its always your best option. Here are five reasons you shouldnt close a credit card:
What You’ll Learn: Whether Or Not Closing A Credit Card Account Will Affect Your Credit Score
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Perhaps you’re ready to part ways with your credit card maybe you’re sick of paying the annual fee or you’re ready to stop racking up debt. Whatever the reason, you’re probably wondering if closing a credit card hurts your credit.
Its not always the case, but closing a credit card can affect your credit score and report, especially if you’ve held onto the card for a long time. Well help you understand the consequences and benefits of closing a credit card so you can make the best decision.
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When Closing A Credit Card Makes Sense
Closing an extra card may still make sense if:
- You always pay your credit card balance. If you never carry any credit card debt over month to month, your credit score may not be adversely impacted by a closed account. Just keep in mind that your credit card issuer needs time to report your balance as paid to the credit bureaus.
- The account isnt your oldest. The age of your oldest account may have a significant impact on the evaluation of your credit history. If the account you want to close is a newer one, closing it could have a much smaller impact on your credit score when its history is removed.
- You have too many credit cards. If you feel all those different credit card companies are starting to become unmanageable or if you have a hard time paying them all each month, it may be a good idea to consider closing an account. If you have cards that you dont use or check often, you could be at risk for identity theft. Decide if keeping them open is worth it.
Why Hasn’t My Score Changed After Paying Off Credit Cards
Your score won’t get an immediate update once you pay off credit cards. That can be a disappointment when you’ve put a lot of effort into cutting down your balance. But all other things being equal, you will likely see an improvement in a relatively short period of time.
The credit scoring models may not update your credit score immediately so that they can also take note of whether you’ve simultaneously taken on more debt, which would also be reflected in your credit score. All in all, allow for at least one to two months after paying off a balance for your credit score to be recalculated.
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What Are Your Next Financial Goals
After you have a clear understanding of what got you to this point, the next thing to evaluate is your next financial goals. Those will play into how you should handle your credit card, besides paying it off.
If debt payoff is the only thing on your mind right now, then its perfectly fine to have a laser focus on that.
If you dont trust yourself to keep off the credit, you could first start with cutting up the credit card.
If that doesnt work because youve memorized the number or have it saved on too many websites as a payment method, then closing should be the next consideration.
However, if you have other goals in mind, such as buying a car or home, dont close the credit card right away.
For various reasons that well discuss in a minute, that will have an impact on your credit score. So, even though it can prevent you from spending, it could also prevent you from spending on the things you really want for your future.