Do you have a credit card you’re thinking about canceling? Maybe it’s one that has an annual fee or a really high interest rate. Or, perhaps you just haven’t used it in a very long time.
In this article, we’ll talk about how to know when you should and should not cancel a credit card — and how to cancel it if that’s what you decide you need to do.
When You Should Cancel a Credit Card
First of all, we should be clear that there really aren’t any hard and fast rules about when you should cancel one of your credit cards.
In fact, it’s most often not the best decision since canceling a card can at least temporarily hurt your credit score. But there are two big financial reasons why you might want to shut down one or more of your cards for good:
1. Your Credit Card Is Costing You More That It Rewards You
If you have a credit card that charges an annual fee, consider canceling it if the value the card provides to you doesn’t outweigh that fee.
Add up the total cash value of the benefits you receive from your card and compare that against the annual fee. You might find that paying the annual fee is well worth what you receive in return.
If you can’t justify the annual fee based on the rewards you’re receiving, you should consider canceling the card — but not before you consider the potential impact to your credit, which we’ll talk about shortly.
2. Having the Card Is Leading You to Spend More Than You Should
The second big reason to consider closing a credit card account is if having that card and its available spending power is resulting in you making purchases you would not otherwise make.
Just because you can buy something doesn’t mean you should.
Additionally, you may be creating debt for yourself that you won’t be able to pay off without incurring some hefty interest charges.
If you’re someone who has a hard time controlling your spending, more credit may not always be a good thing. However, before you cancel your card, consider less drastic options like simply cutting up your physical card or literally freezing that line of credit. Here’s why…
Consider the Impact to Your Credit Before Closing a Card Account
Once you’ve decided that a credit card is detrimental to your finances either because it’s costing you more than it’s worth or it’s leading you into temptation, you have to take into account the effect that canceling that card would have on your credit score.
Your credit score is calculated using five key components:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit (15%)
- New credit (10%)
- Credit mix (10%)
Closing a credit card account could impact three of these: Credit utilization, length of credit and credit mix.
Your credit utilization rate is the percentage of credit that you have available compared to your credit card balances. For example, if you have three credit cards with a $10,000 limit in total and you owe a $4,000 balance across those cards, your credit utilization rate is 40%.
As far as credit scores go, the lower your credit utilization rate, the better.
“A ratio of less than 30 percent is acceptable,” says U.S. News and World Report credit card expert and consumer finance analyst Beverly Harzog, “but closer to 10 percent helps to boost your score.”
Closing a credit card that you no longer use can hurt your credit score because you could raise your credit utilization rate by reducing the total amount of credit you have available to use versus the amount of credit you are currently utilizing.
In our example above, if one of those three cards had a $5,000 credit limit and that’s the one you cancel, your utilization rate will jump from 40% to a whopping 80%. That will almost certainly have a negative impact on your credit score.
Length of Credit
Another thing to consider before you cancel a card is how long the card account has been open.
Credit cards that you’ve held for a long time have a bigger impact on your credit score than more recently opened cards. If the card that you’re considering canceling is one that you’ve had for many years, you may not want to close it.
You should consider keeping credit cards with substantial history open if you don’t have other longer-held credit cards.
“When you close a credit card account, your history will eventually fall off your report,” says Harzog. “But that could take up to 10 years, so you won’t see a negative impact related to your length of credit history right away.”
Finally, less important but still a consideration, is your credit mix.
People who have different types of credit — credit cards, a mortgage, a car loan — are viewed more favorably than those who might have just one kind.
If you are considering canceling a card and it’s the only credit card account in your name, think twice. Your score could see a minor ding without that in the mix.
Before Canceling a Card, Consider Asking for a Downgrade
If the reason you are considering canceling your card is that you can’t justify the annual fee, you can call the credit card issuer and see if it’s possible to downgrade your card to one without a fee. That strategy worked for Team Clark contributor Eric Rosenberg:
“I recently converted my old American Express EveryDay Preferred to the EveryDay card when I shifted my spending habits to a card with better rewards,” he says. “Downgrading meant I didn’t have an annual fee but could keep the account open for credit-building purposes.”
While this may not be possible in your particular situation, it doesn’t hurt to ask.
How to Cancel a Credit Card in 5 Steps
If you’ve taken all of the above into consideration and decided that it still makes sense to cancel your card, there are some steps you can take to make sure the cancellation of the card is done properly.
1. Make Sure the Balance on the Card Is Paid in Full
Technically, you can cancel a credit card that has a balance on it but you are still responsible for paying that balance. You won’t be able to use the card any longer and interest charges will accrue until the balance is paid in full.
If you want to cancel a card but have an outstanding balance that you can’t afford to pay in cash, look for balance transfer offers that charge little or zero transfer fees and offer a 0% interest introductory rate.
2. Redeem Outstanding Rewards
If your card was earning cash back or other rewards and you have outstanding rewards available on the card, make sure to redeem them before you close the card. If you wait until after you close the card, your reward points may no longer be valid.
3. Cancel Any Automatic Charges Linked to the Card
If you are paying any of your monthly bills with the credit card you are canceling, make sure to change the payments to another source before you close the account. This will help you avoid any missed or late payments on bills.
4. Call the Credit Card Company to Cancel the Card
Each credit card company has different procedures for credit card cancellation. Call the issuer or check the company’s website to get their specific guidelines for closing the account. Then, follow the directions exactly in order to avoid any misunderstandings.
5. Check Your Credit Report to Confirm Cancellation
Any time you close an account, it is reported to the major credit bureaus. This can take a bit of time, but after a month or so has passed, check your credit report to confirm that the card has, in fact, been canceled. Here are several ways to get your credit report for free.
If you don’t see the account closure on your report, call the card issuer to make sure your request was honored. If it wasn’t, you may need to repeat the process.
As you can see, in most cases canceling a credit card isn’t necessary and can actually hurt your credit score. But if you’re tired of paying an annual fee with no returns or can’t trust yourself to use a card wisely, that may be the best course of action.
Just make sure to carefully consider the ramifications and follow the process outlined above and you can move on with one less financial consideration in your life.