How to Minimize the Impact of Canceling A Credit Card

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Credit cards with bullet holesWith the passing of the CARD Act, credit card companies have been responding by instituting purchase-based annual fees. Before the CARD Act, many issuers were trimming their books of inactive, low-activity, and risky credit card accounts. You may remember American Express offering cardholders a financial incentive to close accounts.

In this environment, there may come a time when you will want to cancel a credit card. A few years ago, canceling a credit card was easy. You called them and told them you wanted to cancel, they try to keep you around, you did that dance, and then diced up your card. Nowadays, you go through the same charade, but now you have to be worried about how the cancellation would impact your credit score! Boo!

So here are some tips on minimizing the impact of canceling any one credit card.

Use a Debit Card

Bottom line: You don’t have to use credit cards. I think credit cards are better than debit cards but banks don’t charge you annual fees for debit cards. By using a debit card, you are in total control. You won’t owe anyone money and you won’t pay interest. On the flip side, you won’t be building credit but there are plenty of other ways to build credit. By sticking with a debit card, you never have to worry about the impact of canceling a credit card.

Use a Credit Union Credit Card

The problem with the large corporate credit card issuers is that they have millions of customers and they have stockholders to keep happy. Credit unions, and local banks, usually don’t. With credit unions, the customers are the owners and so you often get favorable rates and treatment with a credit union card. The benefit of this is that you get to build credit and you probably won’t see a nasty surprise letter informing you of huge rate hikes, excessive fees, or unexpected cancellations.

Have & Use Several Credit Cards

Throughout the entire financial crisis, I never once received a message from Discover stating they were lowering a credit line, canceling a card, or requiring an annual fee. I’m not saying Discover is immune from the financial crisis, far from it, but if you have several cards then the canceling of any one of them will have only a minimal effect.

The reason your score goes down when you cancel a card is because your credit utilization will go up and the average age of your revolving accounts will (likely) go down. Credit utilization refers to how much of your total credit limit you are currently using. By actively using several credit cards, you can benefit from incremental credit line increases (such as with Citi where you can request no-credit-inquiry credit line increases), which will reduce the pain of canceling any one card.

Request Credit Line Increases

This goes hand in hand with the second tip of using several cards. Take advantage of credit line increases whenever you an. You can ask Citi for one and they may grant it to you without a credit inquiry, which is a good thing. With other issuers you may have to call and ask for an increase, but confirm that they don’t do a hard credit inquiry prior to approving you because hard inquiries will damage your score.

Don’t Cancel The Card

If you want to minimize the impact of canceling a card and you have a choice, don’t cancel it. In the case where the issuer is instituting an annual fee, try to get the card converted to one without that fee. Try to roll the credit limit on the card to another card you have that is issued by that company.

In the end, canceling a credit card isn’t the end of the world. When I played with Credit Karma’s credit score simulator and pretended to close my oldest credit card, my TransUnion credit score of 731 didn’t change. If you’re a year away from getting a car loan or a mortgage, I wouldn’t worry too much about the penalty. If you’re a month away, keep the card until after you get the loan, then let it be canceled because by then your score will matter less.

(Photo: baptistefranchina)

{ 12 comments, please add your thoughts now! }

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12 Responses to “How to Minimize the Impact of Canceling A Credit Card”

  1. dilbert69 says:

    Discover did recently cancel my card, which presumably lowered my credit score. They said it was for inactivity, but the never gave me a warning that I was in danger of losing it. I don’t really miss it, and I assume my credit score only went from 800+ to 790+. Also, I’m not in the market for new credit. But now you have one piece of anecdotal evidence that Discover also cancels people’s cards without warning. I always thought it was called Discover because every time you go to use it, you discover they don’t take it.

  2. eric says:

    I haven’t been canceled on yet either but good advice to keep in mind.

  3. Dan says:

    re: Debit Cards – you can get into very dangerous territory if you overdraft. Also, they provide very little protection in case of fraud. Someone can wipe your entire bank account out and it takes longer to dispute fraud debit card transactions then credit card transactions. Wouldn’t you rather have your credit line temporarily maxed out than your account liquidated?!

    re: “Request Credit Line Increases” – that is VERY dangerous advice to give in this credit environment, Jim. Many companies, Bank of America/FIA for example, when you submit such increase requests, submit your entire account for review to a credit analyst where more often than not your card gets a credit limit DECREASE or account closure. Most banks do not want to see a request for an increase these days. I would be VERY careful when asking for one.

    • Michael says:

      Citi is a little different. Every time I have to call them for something I ask for a credit increase and they bump it by a couple thousand on stated income without any credit checks. If a bank is decreasing your limit when they look at it that probably means that you are abusing credit cards and living well beyond your means. You should never charge more than 20% of your total limit any given month, and never ever carry a limit.

  4. Good article. I’m often surprised by how many consumers don’t understand how credit scores are calculated. I like the fact that you pointed out several factors such as credit utilization and average age of accounts. Also, I think you aptly pointed out how to use those factors to your advantage. My only caution to readers is that if you have overspending issues (i.e. you can’t control yourself), having an account or two closed will be far less damaging to your credit then late and missed payments.

  5. Shawanda says:

    Good to know for someone who fears she might have to terminate her relationship with her current creditors.

    I recently received a letter from American Express stating they’re increasing my interest rate in October. Which is peculiar since I’ve never paid them a cent of interest since we began our relationship in 2006. However, I’m still offended by the increase.

    If Bank of America and American Express get any more ridiculous than they already are, then I’ll take my business else where. Or at least change my reward program. I’m still leery of putting large purchases on a debit card.

    I never really considered getting a credit card from a credit union. I’ll have to see what kind of rewards they offer.

    • dilbert69 says:

      What difference does the interest rate make if you don’t pay it? I’m utterly unaware of the interest rate on any of my cards. They could double overnight and I wouldn’t even notice, much less be offended. I’ve also asked all of my card issuers to stop sending me those ridiculous checks, and so far it’s worked.

    • Shock says:

      Offended? Take the emotion out of it. You’ll be much happier.

  6. Shawanda says:

    @dilbert69 – As far as credit card companies increasing the interest rate of good customers (those who don’t make them any money) go, I fear this behavior is indicative of what lies ahead. Clearly I’m no more a default risk now than I was over the last three years. So, why the increase?

    I’m curious to see what other schemes they’ll try to concoct in the coming months to extract additional dollars from “deadbeat” customers like you and me.

    • Michael says:

      I think most of this “deadbeat” stuff are scare tactics. Nothing is free in this world. The reason they give you rewards is that they make money from you even if you pay it off. They charge between 1-3% (I think) to the merchant for every purchase. They may not be making much money off of you but they are definitely not losing money. If they were they would just cancel your card. If they do, who cares. There are so many rewards cards out there that it’s unlikely that they will all dry up. The only reason I use a credit card is because I get about $500 a year in rewards and there is some extra protection for big purchases. If the rewards programs dry up I will just use cash again, no big deal.

  7. GoodCreditGuy says:

    Cards issued by banks are ‘either’ a charge card or a credit card, although they’re the same card. If the balance is paid off before any interest is incurred (like me), you use it as a charge care…….if a running balance, with interest being paid, is your bag , you have a credit card. I have a charge card with cash-back option so I actually MAKE money off my charge card.

    If people are so poorly disciplined as to have to pay exorbitant interest (or any interest for that matter) they pay for their lack of discipline where I am rewarded for ….ta da….having discipline

    not too complicated

  8. Tima says:

    Thank you Jim for the simulator link. I tried it out and was astounded how small changes, like a couple of inquiries, can alter my score. It was interesting knowing that in about 6 months, my credit score will max out unless I make some changes, like acquiring a different kind of loan (I currently only have 2 kinds). A very helpful tool indeed.

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