The Safe Way to Cancel a Credit Card

SOURCE: Investopedia

Follow these tips and you won’t harm your credit score.

You’ve heard the advice: Never cancel a credit card account or you could damage your credit scores. And while it is true that closing a credit card can be hard on your credit scores, that isn’t always the case.

Typically, it’s best to leave your credit cards open, even if you’re not using them. However, there are a few valid reasons why you may want to close a credit card account. Keep reading for a breakdown of how to cancel a card the right way.


• Although it goes against general credit advice, in certain circumstances closing a credit card account is necessary.

• A credit card can be canceled without harming your credit scores, if you know what you’re doing.

• Closing a credit card will not shorten the age of your credit history.

• Follow a checklist when canceling a credit card.


Canceling a Credit Card Without Harming Your Scores

There’s a reason why credit experts advise against closing unused credit cards. Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report, explains, “Canceling a credit card has the potential to reduce your score, not increase it.”

This potential score drop often occurs because closing a credit card can impact your credit utilization ratio. The ratio measures how much of your total available credit is being used, according to your credit reports. The more available credit you utilize (per your reports), the worse the impact will be on your scores. Here’s a simple example of how closing a $0 balance credit card could backfire.

• Credit card number one has a $1,000 limit and a $1,000 balance.

• Credit card number two 2 has a $1,000 limit and a $0 balance.

• Your credit utilization on both cards combined is 50%. ($1,000 total balances + $2,000 in total limits = 50% utilization.)

• Close credit card number two and your credit utilization jumps to 100%. ($1,000 total balances + $1,000 total limits = 100% utilization.)

You should aim to pay your credit card balances off in full every month. Doing so not only protects your credit scores; it can also save you a lot of money in interest.

Ideally, you should pay off all of your cards every month, but this is especially important before closing a credit card account. Provided all of your credit cards show $0 balances on your credit reports, you can close a card without hurting your scores.

IMPORTANT: By closing a credit card, you risk increasing your credit utilization ratio and harming your credit scores.


Reasons for Canceling a Credit Card

Canceling a credit card is usually a bad idea. Nevertheless, there are some circumstances in which a card cancellation could be in your best interest. Here are three.

Separation or Divorce
It’s best to close joint credit card accounts during a separation or divorce. As a joint card holder, you’ll be liable for any past or future charges made on the account. It’s not uncommon for an angry ex to run up excessive charges on a joint card out of spite.

If that happens—or even if routine spending occurs on a joint account after separation—the charges will be your responsibility as well. Your divorce decree might say your former spouse is responsible for the debt, but that won’t release you from your obligation in your lender’s eyes.

High Annual Fees
If your card issuer charges you a high annual fee for an account you don’t use, cancellation might be warranted. However, consider the following first.

If you receive benefits from the account that outweigh the annual fee, such as travel credits and perks, it might be well worth the cost. An annual fee on a credit card you don’t use or benefit from is another story.

Before you cancel the account, try calling your card issuer to ask for the annual fee to be waived. Be sure to mention that you’re considering closing your account. It doesn’t hurt to ask, and you might be pleasantly surprised.

Too Much Temptation
Some people find the temptation of using credit cards too much to resist. And while this might be a valid reason to close a card for some, there are other alternatives you can try to curb overspending without sacrificing your credit scores.

For example, you could remove your credit cards from your wallet and store them in a safe place. By not having your cards readily available, you may find the temptation easier to resist.


Cancellation Checklist

When canceling a credit card, here are six simple tips to help you navigate the process.

1. Redeem unused rewards on your account before you call to cancel.

2. Ideally, pay off all of your credit card accounts to $0 before canceling any card. At the very least minimize your balances as much as possible.

3. Call your credit card issuer to cancel and confirm that your balance on the account is $0.

4. Mail a certified letter to your card issuer to cancel the account. In it ask for a letter confirming your $0 balance and closed account status to be mailed to you in return.

5. Check your three credit reports 30 to 45 days after cancellation to make sure that (a) the account reports as closed by cardholder and (b) your balance is $0.

6. Dispute any incorrect information on your reports with the three credit bureaus.


Closing a Credit Card Won’t Shorten Your Age of Credit

You may have heard that closing a credit card causes you to “lose credit” for the age of the account. and hurts your age of credit (worth 15% of your FICO score). That is a myth.

Credit expert John Ulzheimer, formerly of FICO and Equifax, confirms that closing a credit card will not remove it from your credit reports. Furthermore, Ulzheimer states, “As long as the credit card remains on your report, you will still get the value of the age of the account in both the FICO and VantageScore branding credit scoring models. The only way to lose the value of the age of the card is if it’s removed from your reports.”

A closed account will remain on your reports for up to seven years (if negative) or around 10 years (if positive). As long as the account is on your reports, it will be factored into your average age of credit. FICO itself confirms that “the FICO Score considers the age of both open and closed accounts.”


The Bottom Line

Don’t close a credit card account without a good reason. Having a lot of credit cards won’t necessarily hurt your credit scores significantly if you handle them responsibly. However, if you need to cancel a card, do your best to reduce all your credit card balances first (preferably to $0), so you can either minimize or totally avoid any credit score damage.