How to Cancel a Credit Card Without Hurting Your Credit
Eric Volkman, The Motley Fool
Updated
It’s not a good idea to impulsively get rid of a credit card
credit card laptop
Image source: Getty Images
It happens to the best of us -- we have a credit card that, for one of several reasons, is no longer useful. Before you get those scissors out and start cutting up that plastic, though, you’ll want to cancel the correct way. After all, if you don’t, that cancellation could negatively affect your credit score. Here are a few tips to help ensure that doesn’t happen.
Determine if you really need to cancel the card
A necessary first step is to figure out whether cancellation is the right move to begin with. Have you had the card you’re thinking about cancelling for a long time? It might not be a wise move since, generally, the longer your overall credit history the better your credit score.
Also, getting rid of a card certainly does not eliminate the balance incurred on it. You are and will be responsible for that debt regardless of whether the card is in active use or not.
As a general rule of thumb, cards should only be cancelled if at least one of the following applies:
High APR -- It carries a high interest rate compared to your other cards but doesn’t compensate with a higher credit limit.
Annual fee -- There’s no point in paying an annual fee for a card that you’re not planning to use.
Temptation -- For whatever reason or reasons, this credit card is burning a hole in your pocket. You just can’t help whipping it out whenever the impulse to purchase something takes hold.
Keep your credit utilization ratio steady
The total of all your credit card balances divided by your total credit limit -- called the utilization ratio -- is a key determinant in your credit score. Considering that, you don’t want to suddenly topple that balance by essentially removing part of your credit limit.
An example will come in handy. Say you own three cards that collectively have a $10,000 limit. The total balance on the trio is $4,000, resulting in a utilization rate of 40%. Say that the card you want to cancel has a $2,000 limit. By axing the chosen card you effectively cancel its $2,000 contribution to the overall $10,00 limit.
If you don’t pay down a similar amount in balance before you cancel the card, your utilization rate will shoot up. In this example, it would leap from 40% to 50%.
That’s bad for a credit score, so make sure you offset the lower overall limit with balance payments -- at least on the target card -- before you cancel. Paying off a balance completely from the soon-to-be-ex-card is also a good move, as it stops the clock on any interest payments.
Another option that can be used in conjunction with balance payments is to…
Request a limit increase on other cards
With the aim of maintaining that all-important credit utilization ratio, consider requesting a credit limit increase or several for your other cards. This, of course, is only effective if you’re a reasonably well-behaved cardholder, paying balances regularly and (ideally) on time.
A credit limit boost has a positive knock-on effect, of course -- you’ll have more room for spending. The credit raise(s) you’re able to secure will compensate somewhat for the amount your soon-to-be former card contributed to the limit.
Keep in mind that the goal here should be credit utilization ratio maintenance. Total balance from all your cards compared to overall credit limit should remain roughly the same, or be lower after the cancellation.
Cancel online, and in writing
Credit card issuers don’t like losing accounts, so if you phone them to cancel your card, it’s very likely you’ll get an offer. Typically, these center on the APR -- how about a lower rate if you decide against cancelling?
If you’re even mildly susceptible to sales pitches (and boy, do issuers know how to pitch), avoid this obstacle completely by cancelling your card online. A great many issuers allow you to do this, and usually it’s a straightforward process.
It should also generate a confirmation email with the details of your cancellation. Regardless, you should follow up with an email or even hard copy letter with all the details of your cancellation (date, last four digits of card number, name, reason if you so desire, etc.) so there’s actual physical communication on the matter. Copy this letter for your records.
Hopefully you’ll receive an answer to this communication, and it’s then when you should finally take the scissors to that unwanted plastic.
Watch your credit report
Your credit report is vitally important to your financial life. It tracks your relationship and history with creditors, which is why it’s a blueprint for other lenders to determine your creditworthiness.
Issuers sometimes make mistakes, and they can err when you cancel a card. Even if you’ve paid down the balance on that cancelled card, it can still show up phantom-like in the report, perhaps even with a balance showing. To avoid this unpleasantness, keep an eye on your credit profile.
The good news is that this is easier to do than ever, with free credit monitoring being offered by card issuers, banks, and other financial entities. It’s a good practice to scan your report as often as it comes out; many of the free services offered by card issuers provide an update with every monthly card statement.
The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
