Cancelling a Credit Card
March 31, 2020
Credit cards are critical to building your financial foundation. They allow you to make big purchases without breaking the bank, help you build credit and might even come with extra benefits like cash back or a 0% introductory APR.
But what if you need to cancel a credit card? It happens. Changes in your earning potential or existing debt structure could make canceling the best bet for your financial future.
Let’s look at the potential impacts of canceling your card, what questions to ask before making the call, a step-by-step guide to surefire cancellation and how to protect your credit score over the long term.
What canceling your credit card means
Prior to canceling your card, it’s worth understanding the impact. First, canceling means limiting your spending capabilities. If one card is already maxed out, there’s no room for unexpected expenses or large purchases.
Next? Understand that your credit score may suffer. As Forbes points out, one significant factor in your credit score is your credit utilization ratio, which is the amount of credit you’re using compared to all available credit. For example, if you have a $5,000 limit card and your balance is $2,500, your credit utilization ratio is 50%. Scores of 30% or less help boost your score, while higher ratios can negatively impact your credit-building ability.
Now consider a cancellation scenario. You have two cards with $5,000 limits each and you’ve maxed out one card. This gives you a credit utilization ratio of 50% across both cards. If you cancel your zero-balance card, however, this ratio immediately shoots up to 100%. While you’ll retain your credit history even if you cancel cards, the sudden spike in utilization can cause credit building problems.
Questions to ask yourself before canceling your card
Even with potential credit risks, canceling your card may still be your best bet. Before making the call, however, ask yourself a few questions:
Why are you canceling your card?
If your balance is low but you’re worried about running it up, put the card somewhere out of reach and out of mind rather than canceling. This way, you’ll keep building up credit without increasing your debt. If you’ve recently separated from a spouse or find that the benefits offered by your credit provider don’t balance out the fees you’re paying — or if their customer service is consistently poor — canceling your card is often the best choice.
What’s the remaining balance?
Don’t cancel your card without knowing the balance and having a plan to pay it off. This could mean paying it outright, or shifting it to a new card with an introductory APR on balance transfers. Call your credit provider directly for the most up-to-date balance information and make sure you take into account both posted and authorized transactions.
Are there any other options?
Before canceling, explore other options. For example, you could ask your credit provider to lower your card limit, in turn reducing the total amount you can spend. Many card issuers also offer mobile apps and financial planning tools that can help manage your money and provide alerts when you reach specific spending limits or payments are due.
Steps to canceling your account
If you’ve decided to close your card, here’s what you need to do:
1. Pay off your balance
Either pay off your balance or transfer the amount to a new credit card with more favorable terms. While some card issuers offer the ability to pay down balances after the card is closed, it’s easy to overlook this obligation and rack up debt.
2. Collect any outstanding benefits
This includes reward points, travel miles and cash back. Many of these rewards expire once your card is deactivated, so make sure to claim or redeem them before starting the cancellation process.
3. Call your provider
Call the number on the back of your credit card. Confirm the card has no balance and ask for it to be canceled. Be prepared for questions about why you’re canceling along with offers designed to keep your business — if you’re not interested, note the time and date of cancellation, get the name of the agent and ask for a letter of confirmation.
4. Send a letter
It’s also worth sending your own letter to confirm cancellation in case there’s a glitch in the system or a processing error. Ask the agent where you can send the letter and send it certified mail if you want proof of delivery.
5. Keep tabs on your credit
For the next month, monitor your credit report to make sure the card is closed. It should indicate the card was closed at the customer’s request. If it says “closed by issuer”, contact your credit provider, as this could harm your credit score.
6. Destroy your old card
Once you’re certain the account is closed and there’s no outstanding balance, destroy your card with a shredder or ask your provider for a prepaid envelope to return the card.
Protecting your credit score after card cancellation
Canceling your credit card won’t harm the “age” of your credit. This is the total length of time you’ve had an active credit card and accounts for 15% of your FICO score. Because the record of credit use remains on your credit report, there’s no age penalty associated with canceling a card. As noted above, however, your credit score may be impacted by an uptick in utilization — especially if any other cards are close to their limit.
Otherwise, after your card is canceled, you’ll need to continue paying all of your bills on time. Don’t overspend, don’t exceed your credit limit and consider asking for a credit limit increase if you find yourself consistently maxing out your budget every month.
In a nutshell
Canceling a credit card should be your last option. Keeping it open, occasionally using it for small purchases and then immediately paying it down is the best way to keep spending under control and build credit.
If you have no other option, do your due diligence before making the call. Confirm and pay down your existing balance, redeem any outstanding rewards, ensure the account is fully closed and be prepared for a potential credit score slump if your utilization ratio climbs too high.
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