How to cancel a credit card
Canceling a credit card boils down to closing your account online or calling your card issuer and canceling over the phone. But before you close that card, however, it's important to follow some steps to ensure you prevent or minimize damage to your credit score:
- Call and negotiate fees. If you're closing the card because of an annual fee, call customer service first. Ask if they'll waive the annual fee in order to retain you as a customer. Consider downgrading the card to a no-annual-fee version if possible.
- Pay off any remaining balance before closing the card. If you can't do this, consider transferring the balance to a low interest rate credit card, or talking with your card issuer about a payment plan.
- Redeem your rewards. If you have any remaining points, cash back, or other rewards, redeem them before closing the account so you won't lose them.
- Update billing information where this card is being used. For example, on automatic bill payments or recurring subscriptions. This will help avoid attempts to charge your card after it's been closed.
- Call your credit card issuer or cancel online. Confirm with them that your balance is zero before closing your account.
- Destroy the canceled card. Cut it up or shred it.
Does canceling a credit card hurt your credit score?
Yes, canceling a credit card can hurt your credit score. To be sure, credit reporting bureaus don't care that the card itself is canceled. Rather, it's the side effects of canceling the card that can affect your score, such as increasing your credit utilization ratio or reducing the average age of your credit history.
How canceling a card affects your credit utilization ratio
Credit utilization measures how much total credit you have against how much credit you're using. Since it makes up 30% of your FICO® Score, it plays a commanding role in the calculation of your credit score. Canceling a credit card affects your credit utilization by lowering how much credit you have and increasing the percentage of how much you're using.
For example, let's imagine your credit card balances add up to $5,000 and all of your credit limits add up to $20,000. Your credit utilization rate is your balances ($5,000) divided by your limits ($20,000), or 25%.
Now let's say you close a credit card with a $10,000 limit. When you close that card, your overall credit limit drops from $20,000 to $10,000. Your credit utilization is still your balances ($5,000) divided by your limits ($10,000), but now your credit utilization ratio shoots up to 50%. The higher utilization ratio will likely damage your score until those balances are paid down.
You can calculate your credit utilization rate by adding up how much you owe across all of your credit cards, then dividing that by your total credit limit across all credit cards. Ideally, it's good to keep your credit utilization below 30%.
How canceling a card affects your credit history
The average age of all your credit accounts and the age of your oldest account together make up about 15% of your FICO® Score. If you're closing an old credit card -- or a recent one but your credit history is young -- you might impact your credit score by canceling it. How much impact will depend on your credit history, but it could be as insignificant as a few points or as gut-wrenching as a double digit drop.
Why you should close a credit card
It's not necessarily bad to close a credit card account. While closing a credit card can hurt your credit score, sometimes it's the right choice. Below are some good reasons you might want to cancel your credit card.
- You're overspending: If having access to a credit card tempts you to spend more than you normally would -- particularly if it's landing you in debt -- you should consider closing your credit card. Keep in mind, though, that regular credit card usage is key to building and maintaining good credit. Consider leaving your credit card at home and using it to pay one or two small bills each month.
- Your interest rate is increasing: If you're currently paying off a card balance and you get a notice that your interest rate is increasing, the Credit Card Act of 2009 gives you the right to opt out of that increase -- as long as it's not due to a late payment. Doing so will likely result in the closure of your account, but you'll be able to continue paying off your balance at the current rate.
- It charges an annual fee, and the benefits don't make up for it: If your credit card charges an annual fee, make sure you're earning enough rewards and benefits to make up for that fee. If not, you'll want to close the card, or downgrade to a no-annual-fee version if possible.
- It doesn't match your spending habits: The best credit cards come with generous rewards programs and benefits that line up with your spending habits and maximize your savings. If yours doesn't, you might want to consider getting one that does. However, as long as it doesn't charge an annual fee, leaving it open doesn't hurt -- and might even help -- your score.
Why you shouldn't cancel a credit card
In general, if canceling a credit card doesn't improve your personal finances in some capacity, you may want to think twice before canceling it. While it's ultimately your choice whether to cancel, here are a few commonly stated reasons that might warrant some more thought.
- You paid off your balance: Getting your balance down to $0 is cause for celebration, but it's not necessarily cause for closing your credit card. As long as you can be trusted not to go into debt again, it's usually better to leave the card open. This will help your credit score by keeping your credit utilization and average age of accounts intact.
- You don't use it often: Closing unused credit cards might seem like an obvious move, but as discussed above, leaving it open can be better for your credit. As long as your card doesn't charge an annual fee, it's often a good idea to leave it open.
- You think you have too many credit cards: It's a myth that having a lot of credit cards is bad for your credit. In fact, as long as you use them responsibly, having multiple credit cards is better for your credit than only having one. Just make sure you can manage multiple payment due dates, and don't apply for too many cards in a short period of time,
- You want a different credit card: If you come across a credit card offer that better suits your needs and you qualify for it, go ahead and apply. You don't need to close your old credit card just because you got a new one.
Alternatives to canceling a credit card
