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How to Cancel a Credit Card

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MasterCard Visa WalletIn the last year, literature in personal finance focused a lot on financial defense like canceling a credit card. There was a lot of talk about credit, credit reports, and your credit score because it’s one of the cornerstones of the modern financial life, whether you like it or not. During that time, many card issuers started canceling cards, reducing credit limits, and otherwise reducing their overall financial risk. Rampant foreclosures and sinking home prices, issuers were scared and started cutting people based on where they shopped!

Now that the economy has recovered, many people don’t want to be in the position they were a year ago – feeling like the card issuers held them and their credit score hostage. The easiest way to do this is to reduce how much credit you use and the quickest way to do that is to cancel credit cards.

How do you cancel a credit card without significantly hurting your credit score?

Don’t Do It

If you are planning on buying a home or car (or otherwise need a loan) in the next year, avoid any changes to your credit unless it’s fixing an existing problem. If you aren’t planning on a large loan in the next year or two, a little financial housekeeping might be in order. You won’t help your score by canceling cards but you could simplify your financial situation and that always helps.

Paying Down Debt

The first step in any credit card reduction strategy is to reduce your outstanding debt. The main reason why canceling a credit card is bad for your credit has to do with credit utilization. Credit utilization is your outstanding balance divided by your total credit limit across all debts. A higher number means you’re using more of your existing credit, which is a bad thing. Canceling cards is bad because it decreases your total credit limit, thus increasing your utilization without increasing your risk (all you did was cancel a card).

Don’t cancel a card that has a balance. If you do, the debt becomes due immediately and you may find yourself in a difficult spot trying to pay it off. Don’t let the issuer know that you plan on canceling the card after paying off the debt because they might boost the interest rate on you (under the auspices of “risk”).

If you have little or no outstanding debt, then your credit utilization number can’t go up significantly.

Cancel Newer Cards First

The second reason why canceling a card hurts your score has to do with the average age of your accounts. This is less important than credit utilization but if you have a choice, cancel the newer cards first. If you have two cards to choose from and the newer one offers better rewards you will use, then cancel the older one. You want to pick the card that fits your needs, you don’t want the credit score industry to do it for you.

If you aren’t sure which card is newer, you can review your credit report to find out how old an account is.

Convert or Consolidate Cards

If you have two cards from the same issuer, consider consolidating credit lines. Ask to have the newer line consolidating into the older line. This, in effect, cancels the newer card but does not affect your credit utilization because your total credit limit remains the same. This is the best result you can have out of canceling a card because you keep the total credit line and you increase the average age of your accounts.

Likewise, if you prefer the newer card’s rewards, consolidate the credit limits and then ask to have the old card converted to the newer one. This can get a little tricky because you want a conversion that doesn’t require a credit check (which hurts your score) and you don’t want a new account. If you request this, be clear with the CSR that you don’t want them to cancel your old card and open a new one, you just want a conversion. Some issuers will do this, others won’t.

Call to Cancel

When you cancel your card, be sure to ask the credit card company to report the closure as “Closed at the customer’s request” and to send you written confirmation. You’ll need to confirm in about 30 days, when the closure is reported, on your credit report and retain the letter in case there is a dispute. You don’t want the report to say “Closed by creditor” because that looks bad.

Canceling a credit card account can be tricky but as you’ve just read, there are only a few moving parts to keep an eye on. In the end, you need to do what makes sense for you and I’ve laid out all the potential land mines along the way. We’ve been trying to simplify our finances for the last year, consolidating cards, canceling bank accounts, and otherwise just keeping our books a little smaller. In that time, I’ve learned that there may be a lot of pitfalls but they’re easy to navigate.

(Photo: thetruthabout)

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21 Responses to “How to Cancel a Credit Card”

  1. cubiclegeoff says:

    My understanding is that the age of the card you are canceling doesn’t have an immediate effect, but takes years before it could have any impact. The impact you really need to think about is utilization.

  2. Hank says:

    Cubiclegeoff –

    The age of your card you are cancelling definitely has an effect. The credit bureaus give weight to how long you have had credit in your name. If you cancel a card that you have had since college, for example, your credit length reported will now be the next longest card you have held.

    I had one card right after college and then waited a few years to get another one. If I cancel that first card, then my credit history will be shortened by a few years making me look like I am not as good a credit risk.

    • cubiclegeoff says:

      In the long-term, yes, but not for about a decade. This is common misinformation.

      From an article on CNNMoney.com (http://moremoney.blogs.money.cnn.com/2010/03/02/dont-sweat-it-canceling-a-credit-card-wont-hurt-your-score/):

      “…the credit agencies from which FICO draws information used to calculate your score hold on to payment history for years — the positive stuff for about a decade and the negative stuff usually for seven years. That information is used to calculate two parts of your credit score. One is payment history, which accounts for 35% of your score and which reflects, among other things, whether you made your payments on time and whether you welshed on any balance you may have owed when you chopped up your card. Another is length of credit history, accounting for 15% of your score, which reflects whether you’re a newcomer to paying people back or not. All that stays, Watts says, if your card goes.”

  3. otipoby says:

    Another way to keep credit utilization down after cancelling a card is to pay off the CC debt more than once a month. This hurts the “free loan” aspect of credit cards as well as cash flow, but it will at least halve your utilization. It just depends on what is more important. For true optimization, try to find out what time of the month your CC reports to the credit agencies and pay off your debt right before that date.
    I don’t do multiple payments very often, but I may do it after a big purchase.

  4. Jim,

    Due to dastardly deeds (slashing rebates) by the people who run the Citibank Shell credit card, I’m going to need a new card soon.

    Am looking for high rebates. Suggestions?

    Thanks

    • Jim says:

      That’s tricky, I would figure out where you spend money and try to find cards that have cashback reward bonuses for those categories. It’ll start getting harder and harder as more cards play these types of games.

  5. Phil says:

    I’ve heard that – rather than calling – you should send a registered letter requesting that the account be closed and written confirmation be sent.
    If things go wrong, you have no proof that you called.

  6. Anonymous says:

    Don’t let the credit card companies bully you around! Cancel whatever you don’t need.

  7. I agree. Keep your credit card requirements to a minimum.

  8. bub says:

    “Now that the economy has recovered, many people don’t want to be in the position they were a year ago”

    …..when did the economy recover? I wish employers had heard of this great news….

  9. ziglet19 says:

    This is a timely article for me – I was just considering closing out a credit card. It’s the one I’ve had the longest, so I have been waffling about closing it, but I simply don’t use it and am trying to simplify all my accounts.

  10. otipoby says:

    I have heard it is good for your FICO to have different “types” of revolving credit such as bank issued CCs and store issued CCs (and auto loan / mortgage). Does anyone know if it is beneficial to have a store issued card plus a bank issued card?

    • Jim says:

      I’ve also heard the “different types” of credit line and it refers not to different types of revolving credit but a mix of revolving and installment. Installment refers to set loans like mortgage, car notes, etc. Revolving is, of course, credit cards and the like where you have a revolving debt that can go up and down.

  11. LovePrepaid says:

    “Don’t cancel a card that has a balance. If you do, the debt becomes due immediately and you may find yourself in a difficult spot trying to pay it off. Don’t let the issuer know that you plan on canceling the card after paying off the debt because they might boost the interest rate on you (under the auspices of “risk”).”

    My understanding of the credit rules are that you would be able to continue paying down the balance on the terms at the time of cancellation. They cannot demand immediate payment of the entire debt. Did something change on this?

  12. CreditShout says:

    Thanks for all the tips! I never would have thought about some of these things, they are all great to keep in mind.

  13. deb says:

    Where was I when ..”the economy recovered”??? Please let my bosses know! Our hours at our engineering firm(we work for the local towns and boroughs) have just been reduced, AGAIN!!

  14. rich says:

    After paying off the balance on my Citicard in the summer of 2012, Citibank first reduced my credit limit from $2000 to $500. A few months later, Citibank sent me an impersonal letter informing me that they decided to close my account. I was a little upset but not too hacked off because the card had only been used for balance transfers. Strangely, earlier this month April 2013, I get a new Citicard in the mail. Wait, I thought my account had been closed? I called and asked them what happened. They said it was an “error” on their part. I wasn’t aware that they could reopen a closed account without asking me first. I asked for a credit limit increase because a $500 card is worthless to me and was denied (credit utilization is something like <5%). So I ended up closing the card altogether. Citi sucks.


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