Canceling a credit card you no longer use is typically a simple process. However, the steps to take and the prerequisites often vary from one lender to another. Additionally, it’s important to consider how canceling your credit card can affect your credit score.
Read on to learn more about how to close a credit card account, why canceling may be a good idea, and how it will impact your credit.
Summary
Does canceling a credit card hurt your credit?
Closing a credit card account can affect your credit score. However, the extent of the impact depends on your credit history and the amount of debt you have.
Credit utilization rate
Before closing a card, consider how your credit utilization ratio (how much of your available credit you’re using) will change. Canceling a card can reduce your available credit and increase your credit utilization ratio, which can potentially lower your score.
To calculate your credit utilization ratio, divide your outstanding debt by your total available credit. For example, let’s say you have $5,000 in credit card debt and an overall credit limit of $25,000 on all your cards. If you were to close a card with a $9,000 limit, your total available credit would drop from $25,000 to $16,000. And if you still owed $5,000 on your cards, your credit utilization would increase to about 31%.
Keep in mind that experts recommend having a ratio of less than 30%, and that 10% or less is even more favorable.
Length of credit history
The length of your credit history depends on how long your credit accounts have been open, including the average age of all your accounts and the age of the oldest one. This factor affects your FICO credit score, as lenders prefer borrowers with longer track records to better evaluate their creditworthiness.
Closing an account, especially an older one, can reduce the length of your credit history. Most financial experts recommend keeping older credit cards open, using them sporadically, and paying them off in full at the end of the month.
Should I cancel my credit card?
Below are some reasons why canceling a credit card may be in your best interest:
High annual fees
If you have a credit card with a high annual fee, you should consider whether the card’s rewards and benefits outweigh its cost.
For example, it may not be worth keeping a travel credit card with a $500 annual fee if you don’t use it enough to take full advantage of its rewards. In this case, you’re paying an annual fee that’s likely more than the money you’re saving from rewards, so canceling the card may be your best bet.
However, if you’re not taking advantage of your annual fee credit card, you may also want to consider requesting a downgrade to a low or no annual fee card.
You’re spending too much
Credit card debt can accumulate quickly if you use your card but don’t pay your monthly bill in full. You could end up paying hundreds or thousands more in interest and taking years to pay off the outstanding balance.
Additionally, carrying too much debt can increase your credit utilization rate and consequently lower your credit score. It can also make it harder to keep up with your monthly payments, which is the most important credit score factor.
You’re getting a divorce
If you’re getting a divorce, it’s a good idea to cancel joint credit cards or, if you’re the primary cardholder, remove your ex-partner as an authorized user. Keeping the account open makes you legally responsible for any charges made by your ex-spouse. Additionally, if your ex makes late payments, it will negatively impact your credit score.
How to cancel a credit card
If you think closing your credit card is the best option for your financial situation, these are the steps to take:
Pay remaining balances
Find out if your credit card issuer requires full payment of your outstanding balance before canceling your card. In most cases, you will have to pay off your credit card before closing it. However, even if your biller allows you to close an unpaid account, you will still be legally responsible for the bill and it will continue to accrue interest until it is paid.
While it’s not required, having a zero balance before closing a credit card is better for your credit score because it lowers your credit utilization ratio.
Stop recurring subscription payments
Remember to cancel any automatic payments from streaming services or bills, for example, charged to your soon-to-be canceled credit card. If you want to keep your subscriptions active, update your payment information by adding a new card to avoid interruptions or possible penalties.
Redeem any remaining rewards and get your money back
Be sure to redeem your earned miles, points or cash back. Depending on your card’s rewards program, you may end up losing unused rewards after you close the card.
If your card has earned cash back and has an outstanding balance, consider redeeming it as a statement credit to help you pay it off. You can also transfer cash to a bank account.
However, keep in mind that if your card has earned travel rewards, they may lose some of their value unless they are redeemed for travel.
Contact your credit card company
The quickest way to cancel your credit card is to call the company. You can often find the customer service number on the back of your card. However, you may also be able to close your account via your online account.
Expect a letter confirming the cancellation of your card. Keep this for future reference in case the account continues to show up as open on your credit report.
Destroy the paper
Once you have successfully canceled your card, cut it in half or shred it before throwing it away. Your card may remain active for several days after your cancellation request, so destroying it prevents someone from using it to make unauthorized purchases.
Check your credit report
Closed credit cards can remain on your credit report for up to seven years. However, you should review your report about a month after requesting the cancellation to make sure the issuer reported it and that you don’t have an outstanding balance.
Frequently asked questions about how to cancel a credit card
Should you keep or cancel your cards?
Your decision to keep or cancel a card depends on your financial circumstances and preferences. It may be wise to close your credit card if you’re spending too much or don’t want to pay expensive annual fees, for example. But it might be worth keeping your card if you’ll take advantage of its rewards and perks.
What happens when you cancel a credit card?
Canceling your credit card will reduce your total available credit limit, which can increase your credit utilization ratio and lower your credit score. It can also reduce the length of your credit history, another credit scoring factor. However, your score can recover quickly if you continue to make on-time payments.
How long does it take for a credit card to be closed due to inactivity?
Your credit card issuer may decide to close your credit card account if you haven’t used it for about a year or more.
Should I close my credit card if I have a high interest rate?
Closing a credit card with a high interest rate may be wise if you use it regularly and don’t pay off the balance every month. However, this can affect your credit score, so consider paying off your balance in full every month if you can afford it. Other options to explore include transferring your debt to a balance transfer credit card or negotiating a lower interest rate with the issuer.
Money’s summary of how to cancel a credit card
Whether or not you cancel a credit card depends on your financial situation and goals. Keeping a card, even if you don’t use it frequently, is often wise since it helps increase your available credit, which can help your credit score. On the other hand, if you’re spending too much and having trouble paying your monthly bills, canceling it might be in your best interest.
With this in mind, it’s important to consider how canceling a card will impact your credit utilization ratio and length of credit history, two important credit scoring factors. And if the card has an annual fee, consider whether you’re using it enough to reap the rewards and benefits it offers.
If you decide to cancel a card, pay off the outstanding balance and redeem any accumulated rewards as you may lose them. Also, review your credit report at least a month after the cancellation to make sure your issuer has reported it to the major credit bureaus.