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There are many reasons why you might want to cancel a credit card. Perhaps you're tired of paying the annual fee, you have no use for it anymore, or you're ready to upgrade to a card with a better rewards program. But not so fast: Closing a credit card can hurt your credit, especially if it's an account in good standing that's been open for several years.
Here's what you need to know about how closing a credit card affects your credit.
How Closing a Credit Card Will Affect Your Credit Score
Closing a credit card can affect your credit score for a few different reasons.
For starters, when you close a credit card account, you lose the available credit limit on that account. This makes your credit utilization ratio, or the percentage of your available credit you're using, jump up—and that's a sign of risk to lenders because it shows you're using a higher amount of your available credit. Experts recommend that you keep your utilization rate under 30%, and in general, the lower the rate, the better. To calculate your credit utilization ratio, divide the total of all your credit card balances by the total of all your credit limits; your resulting percentage is your utilization ratio.
Another reason closing a credit card can cause your score to drop is that it can lower the average age of accounts on your credit report, especially if it's an account that's been open for a long time. This is because the age of your accounts is factored into your credit score, with longer payment histories bolstering your credit score. If you close an account that's been in good standing for many years, canceling it, and thus lowering the average age of accounts in your report, can ding your credit score.
While your scores may decrease initially after closing a credit card, they typically rebound in a few months if you continue to make your payments on time. It becomes evident that you just closed an account and didn't take on new debt, but it can take some time. So don't cancel a credit card if you plan to apply for other credit, such as a mortgage or auto loan, in the next few months.
When Canceling a Credit Card Makes Sense
There are a few situations in which it may make sense to cancel a credit card. For example, if:
- The card has a high annual fee and the benefits aren't worth it to you
- The interest rate on the card is high and you need to carry a balance
- You are struggling to manage your debt load and are having trouble resisting the temptation of living beyond your means with the card
- You want to get rid of a bare-bones card, like a student card or secured card, in exchange for a regular or rewards card
When It's Better to Keep the Card
On the flip side, there are certain circumstances when it can be wiser to keep the account open, such as when:
- It's the oldest account on your credit report
- You don't have many other open credit accounts, which can result in a thin credit file, making it harder to qualify for future credit
- The only reason you're canceling it is that you don't use it very often
How to Close a Credit Card Safely
If you've decided that it makes sense for you to cancel your credit card account, here are the steps to take so you have no issues:
- If you have an outstanding balance, reach out to your credit card issuer and come up with a plan for paying it off. If at all possible, pay off the card before canceling.
- If it's a rewards credit card, redeem any outstanding rewards so they don't go to waste.
- Contact customer support and let them know you'd like to close the account, and ask that they confirm it with a notice in writing. Ask that it be noted that the account was closed at your request.
- Follow up with a short letter to confirm your cancelation in writing. In this letter, you should put your name, phone number, address, credit card account number and any details about your call with customer service. Make sure to note that you want the account closed at your request, and keep a copy on file just in case. It can take a few weeks for your request to be processed, but if you haven't received a confirmation letter within a month, call your credit card issuer to follow up.
- If the credit card is connected to any automatic payments, such as your cell phone bill or Spotify account, go through those accounts and update your payment information to another option so you don't accidentally miss any payments.
- If you have any authorized users on your credit card account, let them know that you are closing the account and ask them to destroy their card.
- Now it's your turn to properly destroy your credit card. If your shredder is capable of shredding cards, put it through that. If not, cut up the card thoroughly, and consider putting pieces of it in different trash bags around your home, which would make it harder for a potential thief to find and piece together your credit card information.
Alternatives to Canceling a Credit Card
If you've decided it's worth it to keep your card around to help your credit, there are a few ways you can remedy the issues that were leading you to want to cancel the card.
For credit cards with burdensome annual fees, call your issuer and ask if they would consider lowering or waiving the annual fee for a year. Some credit card issuers are willing to do this as a way to retain customers.
If you're worried you'll overspend or get into more debt if you keep the card, stash it somewhere secure or even freeze it in a block of ice. If you're really struggling to resist the temptation, some issuers will let you pause your credit card account, meaning it can't be used by anyone, but it isn't closed. Call your issuer's customer support and ask whether this is an option.
If you want to cancel the card because you rarely use it, keep it active by either putting one small purchase on it each year or putting a small recurring monthly charge on it—for example, your Netflix account. Just make sure you don't forget about it, and always pay it off right away so you don't get stuck paying interest. This will help keep your account open and active without you having to think much of it, since some issuers will automatically cancel a card if there is no spending activity for a year.
Check Your Credit Before Closing an Account
Closing a credit card account can make sense in certain circumstances, but it's important to understand that it can adversely affect your credit score. Before your close your account, consider taking a look at your credit report to see where you stand and make sure that closing the account won't leave you with a credit history that's too thin or too new. While the negative effects of closing a credit card account are usually temporary, it might be worth keeping a long-standing account open if you're able to.