If you have a credit card you no longer use, you might want to close the account and chuck the card. For instance, if your card charges high interest rates or fee, or provides stingy rewards, you might be able to obtain a more attractive card. It’s not hard to cut the old card in half, but like other things in life, you can pick the right way or the wrong way to go about. Snipping a credit card is definitely just a part of the kiss-off.
If you only cut the card, your credit report would indicate that you still own the credit card and the can access the accompanying credit limit. That credit limit affects your credit utilization, which is one of the factors that determines your credit score. In fact, your FICO credit score uses credit utilization as part of the Amounts Owed category that encompasses 30 percent of your score.
Closing a credit card has both positive and negative impacts on your credit score.
If you obtain new credit cards but don’t cancel ones you no longer use, you’ll see an increase in your total available credit. If your available credit suddenly increases by a substantial amount, it could hurt your score, especially if your credit history is short. That’s because creditors might take the sudden increase as an indication of financial distress.
On the other hand, it may not be a good idea to cancel a card and replace it with a card you don’t really need, because it will reduce your average account age. That can reduce your FICO score when you have scant credit history.
Ultimately, understand that closing a credit card account will not raise your FICO score. If that’s your sole objective, choose other tactics.
Just Say No to Compulsive Shopping
If you can’t stop yourself from shopping till you drop, you might benefit by closing most of your credit card accounts. If you have just one card, its credit limit will determine the amount of damage you’ll do, at least in the short run.
However, unless you then pay down your card’s balance, your credit score could suffer. The reason is that keeping a high card balance relative to your available credit limit (which is called your credit utilization ratio) may reduce your FICO score. You can decrease the ratio by applying for a higher limit on your remaining card, but that undercuts the original reason you got rid of your other cards.
If you really are a shopaholic, consider getting rid of all your credit accounts and using your debit card instead. It’s a lot harder to overspend when you see your bank account shrink right before your eyes.
Credit History Endures
Another thing to remember is that your usage of a credit card remains on your history for 10 years after you close the account. That’s true whether or not you have negative marks on the account. In fact, derogatory information such as defaults and collections remain on your credit history for “only” seven years. In other words, the good parts of your credit history can outlast the bad ones by three years or more .
Here are the steps to take to properly cancel a credit card:
- Choose which one to close: If you’d like to cancel multiple cards, begin with the one that charges the highest interest and fees.
- Don’t lose your rewards. You can forfeit your accrued points, miles, or cash back when you cancel your credit card. Always redeem your rewards before terminating a credit card. Check with the card issuer on the procedure to redeem your outstanding rewards. For example, an issuer might offer you a statement credit for your remaining rewards, but you might prefer a check. Before cancelling a card, find out precisely what hoops you must jump through.
- Pay the balance. You can’t cancel a card until you zero out the balance. But what if you can’t pay it all at once? Consider transferring the balance to another of your credit cards. This is an especially good idea if the card you’re transferring to is running an introductory zero interest promotion on balance transfers. This kind of transfer usually incurs a one-time 3% fee. If you try to cancel a card without paying off the balance, you might be hit with late fees or other penalties.
- Confirm your balance is repaid. Don’t assume that you’ve repaid the balance on the card you want to cancel. In fact, some residual interest may remain even if you’ve paid the last balance. Contact the card issuer to confirm your balance is zero.
- Pull the trigger. Now you’re ready to request cancellation. You might be able to do so at the card’s website. However, many issuers make you talk to them first, usually in an effort to change your mind. That’s not all bad, because they may offer to lower your interest rate or raise your credit limit. These Jedi mind tricks might cause you to second-guess your cancellation request. However, if you are resolute, insist on closing the account at your request.
- Verify the account is closed. Ensure that your final card statement shows the account is closed and the balance is zero. If you like, you can send the card issuer a letter confirming your request to cancel the account.
- Grab your scissors. Cut the card into teensy-weensy pieces so that dumpster divers can’t reconstruct your account number.
- Review your credit reports. Check your credit reports from the three major credit bureaus (Experian, TransUnion, and Equifax). They should indicate that the account is closed. You can get copies of your reports from Annual Credit Report.com, which is the only federally-authorized source for free credit reports. When you get the reports, take the opportunity to dispute any mistakes you encounter.
You’ve done it! Remember, use your credit cards responsibly and you’ll improve your chances for a good or excellent FICO score.