Canceling a credit card can make sense when the card no longer fits your financial needs or lifestyle. Whether your spending habits have changed or the card's benefits no longer justify its costs, closing a credit card might be right. But before you cancel, it's essential to understand how it may affect your credit score and overall financial health.
When to Cancel a Credit Card
While canceling a credit card can impact your credit score, there are situations where it's a practical decision:
- Separation or Divorce: Closing joint credit cards helps separate finances and avoid shared debt issues.
- Controlling Spending: If a card encourages overspending, canceling it may help reinforce better budgeting and reduce debt.
- Avoiding Fees: Some premium or subprime cards carry high annual fees. Canceling these cards can eliminate unnecessary expenses.
- Managing High Interest: If a card has a high interest rate and carries a balance, switching to a lower-rate card and closing the old one can save you money.
- After Debt Consolidation: Closing extra cards can reduce temptation and help maintain your progress once you've consolidated debt.
How Canceling Affects Your Credit Score
Canceling a credit card can influence several factors that make up your credit score:
1. Credit Utilization
Your credit utilization ratio compares your total credit used to your available credit. Canceling a card reduces your available credit, which can raise your utilization ratio—if your debt level stays the same. A higher ratio may lower your credit score.
2. Payment History
Closing a card doesn't erase past payment history. Late payments, delinquencies, or strong repayment records stay on your credit report for years and continue to affect your score.
3. Amounts Owed
If the canceled card had a balance, that amount still counts toward your total debt. Make sure to pay it off in full before closing the account.
4. Length of Credit History
A long credit history generally improves your score. Keep your oldest accounts open to help maintain a strong average credit age.
5. New Credit
Opening and quickly closing new accounts can signal risk to lenders. If you recently opened a card and want to cancel it, it may temporarily reduce your score.
6. Credit Mix
A varied credit mix (e.g., credit cards, auto loans, and mortgages) supports a healthy credit score. Canceling a card can reduce your credit diversity.
Other Consequences of Canceling a Card
Beyond your credit score, canceling a credit card can result in:
- Loss of access to the credit line
- Forfeiture of unused rewards or points
- Responsibility for paying off any remaining balance
You won't be able to use the card after canceling, but you'll still owe any outstanding debt.
Steps to Cancel a Credit Card Properly
If you've decided to close a card, follow these steps to do it the right way:
- Redeem Your Rewards: Use or transfer any rewards, cash back, or travel points before closing your account. Some issuers may void unused rewards once the account is closed.
- Transfer Recurring Payments: If you've set up auto payments or subscriptions on the card, move them to another account to avoid missed payments or service disruptions.
- Pay Off the Balance: Pay off the card in full to avoid interest, fees, or complications with the cancellation process.
- Contact the Issuer: Call your credit card company to request the closure. Check the cardholder agreement for any specific requirements or conditions.
- Send a Written Confirmation: Follow up with a certified letter confirming your cancellation request. Ask for written confirmation that the account is closed with a zero balance.
- Destroy the Card: Physically destroy the card to protect your information. Metal cards should be returned to the issuer if required.
- Monitor Your Credit Reports: After cancellation, review your credit reports to confirm that the account is reflected as "closed" and shows a $0 balance.
Takeaway
Canceling a credit card can support better financial habits or help reduce fees. Still, it may also impact your credit score. Before closing an account, consider the potential effects and follow the proper steps to protect your credit history and avoid surprises.
Evaluate your reasons, plan accordingly, and choose the option that best supports your long-term financial goals.