Having extra credit cards that you don't use can often be fodder for unnecessary temptation, so maybe you're thinking about closing those accounts. Or perhaps you just have too many cards to keep track of or are paying unnecessary annual fees. Or maybe you just want to limit your exposure to identity theft.
These are all good reasons to consider canceling a credit card, which is not a difficult process in itself. But canceling a card can also have a negative impact on your credit scores, so there are some questions you should ask yourself before nixing an account altogether.
Here are some questions you should ask before canceling a credit card:
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. While you technically can continue paying off the balance after an account is closed, doing so can have some negative consequences.
For example, you may be subject to higher interest rates or be required to pay additional fees. You may also hurt your credit utilization ratio—one of the factors that go into determining your credit scores—significantly if you close an account that has a balance on it. We will discuss this further below.
2. How Long Have I Had the Credit Card?
The age of your credit accounts plays a role in determining your credit scores. You are rewarded for having a long credit history, so if you close an account that you've had for a long time, it will eventually fall off your credit report and decrease the average age of your accounts. That can drag your credit scores down.
Before closing a credit card that you've had for a long time, consider if you really need to. If you don't use it and don't want to be tempted by it, stick it in a drawer. Alternatively, you could freeze them—literally. There are plenty of cases of people who actually freeze their credit cards in a block of ice to prevent casual use.
That said, you may want to consider charging at least one small purchase each year that you pay off immediately, so the credit card issuer doesn't cancel it because of inactivity.
3. Am I Paying an Annual Fee?
If you are paying an annual fee on a credit card that you don't use much, or if you're not benefitting from the card's rewards or other perks, it may make sense to consider canceling 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 product that doesn't carry an annual fee. This may allow you to circumvent the hit your credit score may take if you close the account altogether.
4. Will They Make Me a Counteroffer?
You can always call your card issuer and let them know that you're considering closing your account. You may be enticed to stay on better terms, whether that's a lower interest rate, a fee waiver or other benefits.
It doesn't hurt to hear what offers your issuer might make because they could turn the card into a better fit for you. And again, you could prevent a hit to your credit score.
5. How Will Closing This Account Affect My Credit Utilization Ratio?
A big factor in determining your credit score is your credit utilization ratio—that is, the amount of credit you use on a regular basis compared with the amount of credit available to you. When you close a credit account, you are usually decreasing the amount of credit available to you—which means your credit utilization ratio will increase.
For example, if the total credit available to you across all your cards is $10,000 total, and you typically spend $2,000 a month, your credit utilization ratio is 20%. But if you close a credit card that had a $4,000 limit, the total credit available to you is now just $6,000. If you don't change your spending and still charge $2,000 a month, your utilization ratio just went up to 33%. For a good credit score, you want to keep your utilization under 30%—and for the best scores, under 10%.
How to Calculate Your Average Credit Utilization Ratio
To figure out your average credit utilization ratio:
- Pull all your credit statements from the last 12 months.
- Add up the statement balance for each month across all your credit cards and divide by 12. That's how much credit you use per month, on average.
- Next, check the limits on all your credit cards and add them up. If the credit limit total is 10 times or more than your average monthly balance, you are in good shape because you're using 10% or less of your available credit.
If you close an account and eliminate some of your available credit, that percentage will automatically go up, and depending on how high it ultimately goes, you could see your credit scores drop. If you already have a lot of credit available to you and your ratio is currently low, it may not matter if you close one or two accounts. You just have to do the math.
6. How Many Accounts Do I Need to Close?
If you do want to close an account, try not to cancel more than one at one time. That could raise a red flag to creditors, and it could also hurt your credit scores. Focus on eliminating one account and then, if you still need to, look at another potential closure a few months down the line.
How To Close a Credit Card Account
Once you've decided that it makes sense to cancel a credit card, the process is fairly straightforward. (If it was a rewards card, check your reward points balance and redeem any unused points first.)
Start by calling your issuer and notifying them over the phone that you would like to close an account. Again, they might entice you to stay with a counteroffer. But if you're sure you want to cancel the account, politely refuse and ask them to continue with the closure. Be sure to confirm that your account balance is zero.
Let the customer service representative know that you would like it noted that the account is being closed at your request. At the end of the process, they should confirm that they will send you a notice in writing with details of the closure.
Next, you should follow up in writing, as well. Send the issuer a short letter with your cancellation request. Include your name, address, phone number and credit card account number, as well as information about the phone conversation you had canceling your account.
You should also note in writing that you want your credit report to indicate that the account was closed at the consumer's request and that your account balance is at zero. Keep a copy of the letter for your records.
Once you've done this, the card issuer may take several weeks to process the request. If you haven't received a cancellation confirmation letter within a month, call customer service. Don't forget to cut up your card once the process is complete.
Check Your Credit Reports Once the Account Is Closed
Complete the process by checking your credit reports to confirm that the information regarding that closed account is accurate. Be sure to check that the account does not say it was "closed by creditor" if you initiated the closure—that can negatively impact your credit scores.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on January 9, 2018, and has been updated.