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Canceling A Credit Card

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Credit cards with bullet holesBreaking up is hard to do, but canceling a credit card is easy. Call the company, tell them it’s just not working out, then cut up the credit card! Easy right?

What’s a little harder? Understanding the impact that can have on your credit history and score.

Fortunately, the answer isn’t as complicate as you might think.

Why Canceling Hurts Your Score

What impact can canceling a credit card have on your credit score? Canceling a credit card will, in a majority of cases, lower your credit score. The primary reason has to do with credit utilization, a significant factor in calculating your credit score.

Credit utilization is a ratio of the amount of debt you have divided by your total credit limit. If you have have $500 in consumer debt and a credit limit of $10,000, then your credit utilization is 5%. Remember that consumer debt doesn’t necessarily refer to the amount of credit card debt you carry over from month to month, it simply refers to the amount on your statement. So if you charge $500 each month and pay it off in full, your debt amount is still $500 (this is why you don’t need to carry debt to improve your score).

When you cancel a card, your total credit limit immediately goes down, which will increase your credit utilization. There are a variety of other factors that can contribute to your score going down but credit utilization is generally accepted as the biggest reason your score might go down.

Why You Should Still Cancel

The threat of your credit score going down shouldn’t stop you from canceling a card if it makes sense to do so. If you’ve ever been rejected for a line of credit, you’ll know that the potential creditor will mail you a letter with the reasons why they rejected you. On that letter is a list of credit bureau risk reason codes. Several of those codes refer to having “too many” accounts, whether they’re revolving accounts, accounts with balances, or other credit-related accounts. If you have “too many” accounts, you may be rejected for credit.

Another good reason for canceling a card is if you never use it and you want to simplify your finances. It’s difficult to juggle multiple credit card, bank, broker, and other financial accounts. There’s no reason you should try to juggle a card you don’t use anymore. Closing the account is one way of simplifying your financial life.

Alternatives to Canceling

While I would cancel a card without regard to the credit score impacts, I recognize that it’s not the most financially savvy decision. There are alternatives though.

If you have multiple cards with an issuer, request that they consolidate the cards. Consolidating lines of credit will reduce the number of cards you have but not decrease your credit limit, which means your credit utilization won’t increase, leaving your credit score virtually unchanged. Not all issuers offer this but it certainly pays to call them to ask. The cards usually have to be of the same type, so you can’t consolidate a personal credit card into a business credit card, and they must be of the same issuer, of course.

Can’t consolidate? Just stick the credit card in your desk drawer. There’s no direct financial harm in not using a credit card. There are two risks with this solution:

  • The card could be stolen. If someone breaks into your home and finds the card, they’ll probably take it and try to use it. While it’s probably a smaller risk than you losing it as a matter of daily use, it’s still a risk.
  • Issuer may cancel the card for inactivity. Companies have been canceling inactive, and sometimes active, cards for the last year as they reduce their risk exposure. If they do cancel it, it has the same effect as if you cancelled it.

Also, you can always cut up the card without calling to cancel. You still run the risk of the issuer canceling the card for inactivity but you don’t have to worry about it being stolen. You do have to worry about you forgetting you have the card in the first place, which can be mitigated by online account access, if you’ve set that up.

Finally, the best thing you can do to avoid this is by not signing up for a credit card unless you’re absolutely certain you need it.

Didn’t think canceling a credit card could get this complicated huh? :)

(Photo: baptistefranchina)

{ 36 comments, please add your thoughts now! }

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36 Responses to “Canceling A Credit Card”

  1. Fairy Dust says:

    Believe it or not – and I hope this is an extreme rarity – an unused card can be stuck in one’s desk drawer and also “stolen”. It happened to me, and because I had just stuck the card away and never cancelled it, the issuer wouldn’t believe me that I hadn’t used it when, in fact, I definitely hadn’t (the situation was an on-site purchase with a signature in a state I’ve never even been to). If I had cancelled it, this never would’ve happened because that account number would never have worked for anyone else. And I couldn’t convince them it was “stolen” because I hadn’t reported it stolen either (because it was still in my desk drawer). So the whole thing was a huge nightmare for months. Now if I have any card that I’m not going to use, I won’t put it away, I’ll cancel it, even if I take a credit score hit.

    • wizardprang says:

      Well said. The one thing that we’re leaving out of the discussion is “risk”.

      The story is actually a little more complicated. Since FICO is calculated using (among other things) the age of the debt, canceling an old CC will have a bigger effect than canceling a new one.

      In the past year I have canceled two cards; one about five years old, one about one year old. My score (according to CreditKarma) dropped by 18 points (from 778 to 760). I can live with that, and it’s less risky than giving thieves a target.

  2. Ian says:

    Great post. I had a question though. Since the credit history impacts one’s credit score as well, how would credit card consolidation affect the credit history?
    Say, I only have two cards, one 1-year-old and the other 5-year-old, which means the average history is 3 years. I want to consolidate the 5-year-old card into the other 1-year-old card, so would my credit history be 1 year after that? Or if the other way around, would that be 5 years? Thanks.

  3. eric says:

    Good article. There’s been a lot of confusion about this topic.

  4. Danny says:

    Can you do a post about credit card cancellation retention offers, (when you call and threaten to cancel, and they offer you incentives to keep the card open)?

  5. Damon Day says:

    I long for the days when an actual person looked over ones credit history and decided if the individual was a good credit risk or not. Just looking at a fico score alone does not do a potential borrower justice. Paying off a debt and closing a card, in reality should make the borrower appear to be a better future credit risk. Lenders need to stop relying on Fico and start looking at actual reports.

    • Shirley says:

      How true that is!
      My parents had a CC with a well known bank and I was a signer on it, but not an owner. When they had both passed on I tried to close the account and had an ‘quite trying’ time of it even though there was no longer any balance due.
      The result was the card being re-issued with a different number, in my name, and it still shows up on my credit report as having been ‘closed by consumer’ and claims that I lived at their address. A hit on my Fico? Most likely.

  6. Scott says:

    Same thing happened to me last month that happened to FairyDust. Discover card that had been sitting in the desk drawer for 6+ months was “stolen” by someone in Texas. Discover caught it and denied them and is sending me a new card but couldn’t really explain how it happened other than the crook kept guessing numbers until they found one that worked and went with that.

    • Shirley says:

      We use Discover Card and they are very good about ‘catching’ unusual purchases, and alerting you by email (if you’ve chosen that) and telephone.

      The last time that I bought a computer online with SOAN (Secure Online Account Numbers) they emailed AND phoned me to ask if this was a legitimate purchase, within 30 minutes of my completing the transaction. Great service!

  7. Liko says:

    Damon Day, I totaly agree with you. I canceled my cards. Well, I kept one where I buy a candy bar once every other month and pay it off. Just to maintain somewhat of a credit score incase anyone gives a hoot. Seriously, I can’t believe anyone actually looks at this score! It’s so flawed! If I cancel my last cc my score will eventually hit zero! Eventhough my networth is 10x as high as a when my score was 800+! People that have paid off all their debts and closed thier cards down are as risk free as they can get, yet FICO thinks they’re higher risk than someone with a 500 score.

    • kitty says:

      This is not true. 1) your credit score is never 0 as the lowest is 300. 2) I don’t know for sure, but I believe that if you close all your cards, your score would suffer, but it still would be better than that of someone with score of 500. You’ll still have your mortgage and I read somewhere that even after it is paid off it is still included in the score for 10 more years or so. I wouldn’t bet on it, but I don’t believe your score will be as low as 500 just because you closed all cards.

      • Andrew says:

        I thought the lowest credit score was 420 or 450. I agree with you that canceling all your cards probably wouldn’t lower it that low, but it would lower it to where you would have a hard time getting credit and would have to pay astronomical rates.

  8. Liko says:

    The only way to have a high FICO score is to be continually in debt your whole life. Kind of explains whey lenders support this score.

    • Andrew says:

      This has been debunked over and over on this forum. To get a high score, get a credit card, use it, pay it on time and in full, never close it, and repeat with more cards. Also being 40+ and having lived in the US my entire life seems to have helped.

      • Liko says:

        I know that… my point is that I get in debt when I use my card… regardless of when I pay it off, I’m still in debt for that period of time. And if I forget to pay the on time… then the interest kicks in. I think I’ll skip on the FICO score all together than to play this stupid game.

        • dilbert69 says:

          I guess I’m not really worried about being a few hundred dollars in debt for a couple of weeks. When I get my paycheck every other Friday, I pay off all my cards in full. No interest, no late fees, no forgetting, no revolving debt, no problem.

        • kitty says:

          You always owe money to someone for one month: your electric company for example or your phone company. You borrow service e.g. phone use and then you pay for it at the end of the month. How is using a card and paying it off in full is any different? As to the being late for a day — since they invented automated payment of the full balance being on time all the time stopped being a problem.

  9. Terry says:

    I feel like I’m the endless promoter of no credit cards here, and I’m sure that I am. But I feel these credit scores are a false rating of keeping up with the Joneses. I would take a 100 point drop in my credit score to not have or need a credit card. In the long run, you save money by using cash on almost any level. I have been without credit cards for years, and I use debit cards – spent 5 minutes every six months at the bank changing the numbers of those cards to give a small sense of security – and keep a stock of easily convertible cash on hand in a secondary account to use when needed.

    If you manage your money, there are very few reasons to have a credit card. Their false punishment for not having one is a little snake oil thrown into the market to entice people to rack up debit at one point or another.

    I fail to see the obsession with a credit score – unless you’re investing in real estate, flipping homes, etc, what is the benefit of one score or another to your everyday life?

    • dilbert69 says:

      You need good credit to get the best rate on a mortgage for a principal residence, and a truly bad score can make it hard even to rent an apartment.

      • Liko says:

        That’s not totally true Dilbert. There are still plenty of smaller banks and credit unions that will do manual underwriting. No credit score needed. There’s actually a real person that decides on your loan, but you’ll need more documentation. And those loans are still supported by Freddie Mac and Fannie Mae, so you’ll still get the best rates available. No score is not the same as low score.

        • dilbert69 says:

          Define “plenty.” A credit strategy that eliminates 99% of potential lenders doesn’t seem like the best way to get the best terms on what will probably be the biggest loan you’ll ever undertake. Competition is good for the consumer. Back in June I got a 4.875% rate with no points for a 30-year fixed-rate loan, with about $3K in closing costs. My credit score is over 800.

  10. Job Dialouge says:

    If you use a financial aggregation site or program you can keep all your cards open and check on them daily, if you see fraud you’ll catch it right away.

  11. Honey says:

    The BF and I do not plan on ever having children or ever buying our own home, so I also have to say that I don’t see the necessity of everyone having a credit card. Not everyone wants the other things that having a FICO score gets you.

    Buying a home or having a kid is a WAY worse financial decision, IMO.

    • dilbert69 says:

      Without a FICO score, you might have trouble renting an apartment, particularly in a tight rental market. Also, plans change. Finally, a home cannot be bought, only made. A house or condo can be bought. Whether it’s a sound financial decision or not depends on the likelihood of the value rising significantly during the time you own it. Having a child is definitely a bad financial move, but there are other benefits (so they say; I too am childless and plan to remain that way).

      • Liko says:

        You can still rent most apartments with a letter of recommendation from you last apt manager that states you paid on time. But you’re right; it’s kind of a hassle. I’m boycotting every business that requires their customers to have a FICO score. It just shows their management team does not have a brain to think for themselves. If they claim they’re too big to screen everybody, then they’re too big to provide quality customer care too.

        • Liko says:

          On more thing… Not relying on a FICO score can be a hassle… but it’s not as big of a hassle as dealing with creditors and credit card companies that claim they lost your payment.

          • dilbert69 says:

            I haven’t had that problem in 10 years since I started using online banking. My bank just adds up all the payments of all its customers who are paying that credit card on that day, transfers a boatload of money electronically into the credit card bank’s account, and provides an electronic list of everyone’s account number and how much they’re paying. The chances of it getting lost are essentially nil.

          • kitty says:

            My bank just takes the full payment from my checking account every month. No chance to ever be late, no hustle; even if they take their time taking the money off my checking and do it after the due date they still don’t charge me interest because it was their choice. Don’t like them to take the money — use online payments; set up reminders if you don’t trust them to send you emails.

            “Buying a home or having a kid is a WAY worse financial decision, IMO.”

            And when you are old and sick there’ll be nobody to even give you a glass of water or make sure your health care choices are followed or just plain love you. I am childless by the way, not by choice. As I take care of my terminally ill mother, I can’t help thinking who’d do this for me.

            As to not having a home — it can be a bad decision it can be a great decision depending on timing and whether or not you could afford the place you bought. People like me who bought or upgraded in the 90s are doing quite well. For example, I “upgraded”, rented out my old condo, sold it in 2000s and used the money to pay off mortgage on the new place. So now I own a townhouse and pay less every month than people who rent a studio. People who bought on the bubble lost money and yes, anybody with brains could tell it was a bubble. I sure could – I told a friend in 2006 not to buy anything and wait. My only mistake was not to see how it’ll affect the whole economy.

            If you buy right than you may end up paying less every month after deductions (if you are allowed to deduct) than what you pay in rent. If not now than in 2 years or 3 years. Your rent will go up every year. If we get high inflation at some point, your decision not to buy a home will not seem so smart.

        • dilbert69 says:

          First, I wouldn’t want to tip my existing landlord that I’m planning to move until I’ve secured a new place, so that’s a problem. Sometimes I think the anti-FICO people on this forum are more concerned with being nonconformists than with their own best interest. If you want to be a nonconformist, get a tattoo. If you want to be financially successful, learn to manage money (including credit).

          • Liko says:

            I’m not anti FICO, I’m just against worshiping and planning my life around FICO. If I have a FICO score, I’ll use it. But I use to do some STUPID things just to get my FICO score up. Like borrowing money for a car. For most people, maintaining a high FICO score means living a life of debt and interest. I know there are exceptions and people that are highly disciplined, but I’m not one of them, and according to statistics, neither is the average American. I know it’s hard to believe, but there is still life after FICO. I have a lot less stress and a lot more money than I ever did with credit cards.

        • Honey says:

          kitty, having cared for my quadriplegic, terminally ill mother in high school, I am well aware that many parents would like to take advantage of their kids’ love once the parents are old and sick. I think long term care insurance is way more ethical.

          And since, bubbles aside, housing prices increase at exactly the rate of inflation, while housing prices may *look* more expensive by the time I retire, really they won’t be at all.

  12. dilbert69 says:

    No one in their right mind would endorse planning their life around a FICO score, or worshiping same. Also, taking on debt for anything other than a mortgage, an education, or tools of your trade is probably very foolish. Fortunately, it’s not necessary to do so to build up a good FICO score. If you’re not disciplined about money, not using credit cards won’t help, as you’ll just spend as much as you earn anyway. Also, if you used to have credit cards, you still have a FICO score, it’ll just be a low one.

    • Liko says:

      Dilbert, I’m glad you have the discipline to pay your cards off every month. I didn’t when I used cards. Cutting up the credit cards (9 cards) and closing the accounts was essential me (a former shopaholic). This forced me to live on my zero-based budget and not depend on credit cards. Over time this changed my behavior with money. Afer a few years of living on a strict budget I’m sure I can handle paying off a credit card in full each month now. But I couldn’t do that a few years ago. Cutting up the cards and closing the accounts helped me become disciplined about money.

      I still have a good FICO score… upper 700′s… but over time (maybe 10 years) my FICO score will be uncomputable if I don’t borrow money and don’t have any accounts open. I don’t have or need a mortage (I plan to buy a house in cash in about a year), and I think reward points on cc are a joke! I also don’t like reward programs cause they encourage me to shop more instead of less.

      Anyway, if you’ve never had trouble with credit cards and never paid any interest congrats to you, and I’m sure you’ll do fine in the future too. As for myself I’ll stick with the sure way and use cash and check cards (debit) only.

      • dilbert69 says:

        You should do what works for you. If not having credit cards helps you be more disciplined, that’s great. I don’t find that rewards progarms make me buy more, since I only get rewards on groceries, drugstore purchases, and gasoline, areas where my consumption is fairly fixed. I’m not going to buy 10 tubes of toothpaste when I only need 1 because I get a reward. BTW, where on earth can you buy a house for cash? Decent houses in good neighborhoods where I live cost $600,000 and up. One could also argue that even if you have the cash to buy a house, you should invest that cash elsewhere, as mortgage interest rates are low and there are lots of good buying opportunities in the stock market.

        • Liko says:

          Dilbert, I live in Seattle where homes are still pretty expensive here. But I plan to move to eastern WA where homes are a third of the price. My job lets me work from anywhere.

  13. Sandman says:

    I got a letter today from first national bank of omaha, threatening unspecified adverse changes in my card terms unless I started using it. The card was a good deal when I got it, but they had progressively hiked the rate & added a yearly fee, to the point where I had 3 other cards with >$10K credit lines, no annual fee and 10% rates, and their card with an annual fee of $75 and a rate of 17.99% with a $7K credit line. Ironically, that was why I wasn’t using their card. I called them up & tried to diplomatically tell them I wasn’t using their card because their terms weren’t competitive. The lady on the other end curtly replied that 17.9% was the best rate they could give me. Cancelling the card was a no-brainer. I don’t run a balance, but if it hurts my credit score, then so be it. I wasn’t going to be coerced into using a card with inferior terms, so I could keep those inferior terms.


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