How to cancel a credit card and what to consider first
Author: Maria Smith
Canceling a credit card can be an excellent strategy to avoid increasing your debt load. But there are a few things you will want to consider before you cut up that card.
How much does closing a credit card hurt your credit?
Many factors go into your credit score, and canceling a credit card can impact most of them. Sometimes closing a credit card account can positively impact your credit, and sometimes it can hurt it.
First, let's look at your credit utilization ratio, or how much credit you have available vs. how much you are actually using. Lenders recommend a credit utilization ratio of less than 30%, with some lenders not advancing loans at all if your ratio is above 35%.
By canceling a credit card, you decrease the amount of credit available to you. This can increase your credit utilization ratio and, therefore, potentially lower your credit score.
Choosing to increase your credit limit will have the opposite effect, as it could increase your score as your credit utilization ratio increases. But credit utilization is just one factor in your credit score, so don't raise your credit card limit to increase your score.
Here's an example
Let's say you have two credit cards, each with a $5000 limit. You currently owe $2500 on one and nothing on the other. Your credit utilization ratio is 25% (2,500/10,000 x 100%).
If you decide to cancel the card with a zero balance, your credit utilization goes up to 50% (2,500/5,000 x 100%).
Most lenders prefer you to have a credit utilization of below 30-35%. By closing a credit card account, you put yourself in a much higher credit utilization range which can adversely affect your credit score.
Your credit history, or how long you have had a credit product, accounts for approximately 15% of your credit score. The longer your account has been open, the more positive impact it has.
If you choose to cancel your oldest form of credit, which is often your first credit card, you may see a slight dip in your score due to the impact this action has on your credit history. This decrease is often temporary if replaced by other forms of aged credit.
New credit vs. old credit
When you cancel longstanding credit (like your oldest credit card), you may see a dip in your credit score. You may also see a decrease in your score when you apply for a new form of credit.
By closing an old credit card account and applying for another one right away, your credit score may be subject to a double decrease.
For this reason, try to avoid canceling a card and applying for a new one within a short period of time.
Payment history has the most significant impact on your credit score and is different from credit history. Creditors want to know that you are reliable at making your loan payments.
The longer your track record of making timely payments, the less risk you are to lenders. And therefore, the more money you can borrow at better rates.
In this case, not making your credit card minimum payments will negatively impact your score more than paying off the balance and closing the credit card account. This is one situation where canceling your credit card may be your best bet.
Actually cancelling a credit card
Not using your card, cutting it up, or letting it expire, is not the same as canceling it. In order to actually cancel a credit card, follow these five steps:
- Pay off the balance in full. Before canceling, you will want to make sure that the credit card balance is paid off fully. The credit card account cannot be closed if there is a balance. If you still owe money on your card, that balance will continue to accrue interest until it is paid in full.
- Contact the credit card issuer. Once you have paid off the card's balance, contact the credit card issuer to notify them that you would like to cancel the credit card. You can contact the company by phone or in writing. And the contact information will be available on your credit card statements or the back of the card.
- Ask for a confirmation in writing. Make sure to get a confirmation in writing from the credit card issuer that your card has been canceled and the account closed. Once you receive confirmation, it's safe to destroy the card.
- Check your credit card statement. Once your card is canceled, you should receive one final credit card statement from the credit card issuer showing a zero balance. Double-check this statement to ensure there are no errors.
- Monitor your credit report. After canceling your card, make sure to monitor your credit report. It can take up to 30 days for the account to appear as closed on your credit report. But you will want to make sure that your report reflects the closed account. And that there is no fraudulent activity.
Credit card cancellation traps to avoid
Try to avoid these traps before canceling a credit card. Doing so can help protect your credit score.
Don't cancel your oldest forms of credit
Canceling your oldest form of credit may negatively impact your credit score. Depending on your situation, you may be better off downgrading your card or using it only sparingly throughout the year.
Don't cancel multiple credit sources at once
Each time you cancel a form of credit (credit cards, car loans, etc.), your credit utilization, and potentially your credit score, changes. Canceling multiple credit sources within a short time can compound this adverse effect.
Avoid closing a credit card account and opening a new one within a short time
Like canceling multiple credit sources at once, closing one and opening another right away can compound the negative effect on your credit score.
When you apply for a credit product, the lender will make a hard inquiry on your credit. These hard inquiries may decrease your score, so it's best to avoid too many of them in a short period.
Tips to cancel a credit card the smart way
Here are a few things you will want to make sure you do both before and after you ever cancel any of your credit cards.
Use all your points and rewards
Once you cancel a credit card, you will no longer have access to any of the points or rewards that you may have accumulated from using the card. Before calling to cancel, make a plan to use up all of your points and bonuses not to lose them.
Wait to receive any cashback owed
If you have a cashback credit card often, the cash you earn is only paid once annually. Once you cancel the card, you forfeit any earned cashback.
Look into your cashback anniversary, and then cancel the card once you receive your money. Here's a tip: set a reminder in your phone of the cashback date. Once the funds arrive, you can cancel the card.
Update any pre-authorized payments
Make sure to cancel, change, or update any pre-authorized payments attached to the credit card you want to cancel. Failing to do so may result in increased interest charges or other fees related to non-payment.
Pay off your balance in full
As stated above, you will not be able to cancel a credit card if it still has a balance on it. If you want to cancel a card, make a plan to pay off the balance. And then cancel the card.
Confirm the credit card cancellation in writing
When you cancel a credit card, you want to make sure that it's, in fact, canceled. The only way to be 100% sure of this is to get it in writing from the credit card issuer. You can request this confirmation by calling the number on the back of your credit card.
To cancel or not to cancel?
Sometimes canceling a credit card is not in your best interest. When this is the case, you could consider downgrading your card to one without an annual fee.
Or you could pay off the balance of the card and then use the card sparingly throughout the year. Using it every so often and then paying it off right away can positively impact your credit score.
But there will also be times when canceling your card is the best decision or an easier one to make if you are not concerned with your credit score. Unless you plan on borrowing money in the short term, the minor dip in your score when you close an account may not impact you in the long run.