What to Consider Before Canceling a Credit Card

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Canceling a credit card sounds like a simple task, but there are a few things you'll need to consider before calling your credit card company.

Regardless of your reasons for canceling your card, it's important to understand the potential impact on your credit score and what will happen to any rewards you've earned. It's also important to know what your options are to close the account.

Here's what you need to know about canceling a credit card and the steps you should take to do it correctly.

Follow These Steps Before Canceling a Credit Card

Whether you're canceling your credit card to eliminate the temptation to spend, get rid of a pesky annual fee or avoid carrying too many similar cards, here are some questions to ask yourself before you start the process.

1. Am I Carrying a Balance on the Card?

It's best to pay off a credit card account in full—or transfer the balance elsewhere—before closing it. That way, you can wash your hands of the account completely.

To do this, stop using the card for new purchases and either transfer your current balance to a different credit card or pay it off altogether. Also, make sure there aren't any recurring charges that will hit the account after you've paid down the balance, which can delay the process.

2. How Long Have I Had the Credit Card?

The age of your credit accounts is one of the factors that help determine your credit score. There are two elements that determine the length of your credit history: how long you've been using credit and the average age of your credit accounts.

Canceling a credit card will affect the average age of your accounts, but not always immediately. An account in good standing will stay on your credit report for 10 years, and your payment history on that account will be factored into credit scores the entire time it remains. You might see credit score effects when it comes to length of credit history, however, since closed accounts aren't weighted as heavily as accounts you still use, and not every credit scoring model treats closed accounts the same way. Also, once it's closed, the account won't continue to age and increase your length of credit history any more than it already has.

Before closing a credit card that you have had for a long time, consider whether you really need to. If you don't use it and don't want to be tempted by it, store the card in a secure place or even cut it up.

If you're worried about potential fraud, some credit card companies allow you to freeze your card account via their mobile app, making it impossible for anyone to use it for new purchases.

That said, some credit card issuers may choose to cancel your card due to inactivity if you haven't used it in a while. The timeline can vary by issuer, but if you're not planning to cut up the card, consider using it to make a small purchase every six to 12 months and to keep it active.

3. Is There an Annual Fee or Security Deposit?

If you're paying an annual fee on a credit card you don't use much, and don't feel you're getting enough value from the card's rewards or perks, it may make sense to cancel it.

But if the annual fee is the only reason you want to cancel the card, call your issuer and ask them if they can either waive the fee or convert the card to another one that doesn't carry an annual fee. This may allow you to keep the account open at no additional cost.

If you have a secured credit card and you've improved your credit score enough that you qualify for an unsecured card, consider asking the card issuer if you can get your deposit back but keep the account open.

If you can't get the card's annual fee waived, have it converted it to one with no annual fee or get your deposit back, canceling the card may be your best option.

4. Will They Make Me a Counteroffer?

If you're considering closing your account, you can always call your card issuer and let them know—they may make an offer to try to get you to stay. They may say you're qualified for bonus rewards if you keep the account open and spend a certain amount within a set time period. Or you may score a lower interest rate or have your annual fee waived. There's no guarantee you'll get an offer, but it doesn't hurt to find out.

5. How Will Closing This Account Affect My Credit Utilization Rate?

A big factor in determining your credit score is your credit utilization rate, which is calculated by dividing your credit card's balance by its credit limit. That same calculation is also done using the sum of all of your credit card balances and credit limits.

When you close a credit account, you decrease the amount of credit available to you, which increases your credit utilization rate across all of your remaining cards.

For example, if the total credit available to you across all your cards is $10,000, and your current balances amount to $2,000 a month, your utilization rate is 20%. But if canceling a card drops your total available credit to $6,000, and the total of your balances on your remaining cards stays at $2,000, your utilization rate will be 33%.

Credit experts recommend keeping your utilization rate under 30%, and the lower, the better. If canceling a card, especially one with a high credit limit, would drastically increase your credit utilization rate, it may be a good idea to work on paying down your other card balances first to avoid a negative hit to your credit score.

To figure out your credit utilization rate:

  1. Pull your most recent credit card statements.
  2. Add up the statement balance for all your credit cards.
  3. Check the limits on all your credit cards and add them up.
  4. Divide the sum of your balances by the sum of your credit limits.

With this in mind, check to see how canceling one card will affect your utilization rate before you proceed.

6. Do I Have Unused Rewards?

Depending on the type of credit card you have, you may forfeit unused rewards if you close it. This is particularly true with cash back credit cards and cards that earn points or miles with a card issuer's proprietary rewards program—think American Express Membership Rewards and Chase Ultimate Rewards.

If you have a rewards balance, try to redeem what you have or figure out if you can transfer your points or miles to another card you may have in the same rewards program or to a spouse or partner.

If you have an airline credit card or a hotel credit card, all the rewards you earn are transferred to the frequent flyer or hotel rewards program of the co-branded partner. This means that if you close the account, it won't affect your rewards at all.

How to Close a Credit Card Account

If you've decided it makes sense to cancel a credit card, here are the steps you can take to complete the process.

1. Check Your Rewards Balance

If you have a rewards card, check your rewards balance and read the fine print in your credit card agreement to find out what will happen to that balance if you close the account. Canceling a card may mean forfeiting your rewards, so if that's the case with your card, find a way to cash out before you proceed.

2. Contact Your Card Issuer

Depending on the company, you may be able to request to close an account via live chat or a secure online message, though some card issuers require you to call.

Again, the card issuer might try to entice you to stay with a counteroffer. But if you're sure you want to cancel the account, politely refuse and ask them to process the closure. Be sure to confirm that your account balance is zero.

At the end of the process, your card should be canceled immediately. They'll send you written notice of the card's cancellation that includes details of the closure.

3. Consider Following Up in Writing

It's generally not necessary, but if you want to be sure, send the card issuer a short letter with your cancellation request.

Include your name, address, phone number and credit card account number, as well as information about your initial request to cancel the account. Keep a copy of the letter for your records.

4. Destroy the Card

Even if your account has been closed, it's in your best interest to make it impossible for anyone to use the card fraudulently. If it's plastic, cut it up with scissors or use a shredder. If it's metal or another hard material, ask the card issuer if it provides a card recycling service. If so, the issuer can send you an envelope you'll use to return the card to the issuer.

5. Keep an Eye on Your Online Account

Again, the account has been closed, but it is possible for transactions to show up. This is especially common in the case of refunds. If you return an item you purchased with the card or the card issuer refunds a portion of your annual fee, it can show up as a credit. If this happens, contact the card issuer to ask for a refund check.

What Happens When You Cancel a Credit Card?

As previously mentioned, there are a couple of ways that closing a credit card account can impact your credit score. The first way concerns a card cancellation's effect on the average age of your accounts, which won't be immediate or drastic, but can hamper future credit score growth.

The second way is how it changes your credit utilization rate, which is something that can damage your credit score more quickly and significantly. Creditors typically report account activity monthly, so you may see a change as soon as the account is no longer reported as usual.

Keep in mind, though, that your credit score may not be immediately impacted at all, especially if you have low balances on your other credit cards—an increase from 3% to 10%, for instance, likely won't make major waves.

Also, remember, card issuers usually report balance information monthly. So if your balances drop significantly from one month to the next, you could see your credit score bounce back.

Keep an Eye on Your Credit Report and Score

Canceling a credit card may or may not affect your credit score, but it's important to go through the process thoughtfully and carefully to make the process go as smoothly as possible.

After you close the account, check your credit report to confirm that the information regarding that closed account is accurate.

Also, keep an eye on your credit score to see how it changes once the closure goes into effect. It may take a month or so to update but check regularly to understand its impact and take further steps as needed to get your score back to where you want it to be.