Canceling a credit card comes with its own risks and benefits. In general, it is recommended to keep your old cards active even if you don’t use them often. Long-standing accounts can go a long way in helping you maintain a good credit rating. But when does it make sense to close an inactive or unused credit card? Will doing so guarantee damage to your credit score or history?
How it affects your credit
If you really want to close a credit card, it is best to be aware of things that can happen. You should know that it can increase your credit utilization ratio, which is the ratio of your credit card balance or debt to the credit limit. By canceling a credit card, you could lower your available credit amount, which will then increase your credit utilization ratio and lower your credit score.
Another risk of closing an older account is that it could negatively affect your credit history, which makes up about 15% of your FICO score. Doing so can shorten the length of your credit history, especially for long-standing accounts. A poor score or short credit history could hurt your chances of qualifying for loans (with good rates and favorable terms) in the future.
When it is okay to cancel a credit card
While closing a credit card is not always recommended, there are a few good reasons to do so. Financial advisors and bankruptcy lawyers suggest assessing your decision first to make sure it is an informed one. Here are three reasons you might want to cancel a credit card:
- Your cards have unfavorable terms — You may consider closing an account if it carries extremely high fees. This is particularly true for premium cards that no longer fit your budget or lifestyle. However, note that it is always better to close new accounts than old ones, especially if you want to maintain a strong or long credit history.
- You have difficulties using the cards responsibly — If you’re missing payments or using the card excessively (piling up on credit debt), it is probably the time to close it. If you’re worried that you will not be able to pay off what you owe, canceling the card may be a good idea.
- Your unused cards have an annual fee — If the annual fee in your unused credit card unnecessarily costs you, it may be better to close it. However, before doing so, it is better to ask the issuer or credit card company to downgrade your credit card to another or waive the annual fee. By doing so, your credit utilization won’t go up, and you’ll keep your credit history.
How to cancel a credit card (the smart way)
If you have a reason to cancel a credit card, be sure that you do it the right way. This means minimal damage to your score or credit history.
- Pay off your remaining balance — Until your remaining balance is paid, you can’t completely close a credit card. It is best to pay it off first or transfer the balance.
- Check if you need to use or redeem the remaining rewards — See if the terms of your programs require you to redeem your rewards before closing. Earned points or rewards are more likely to disappear when you cancel your account.
- Contact your credit issuer — To request and start the cancellation process, call your credit card company. You may find the customer service number on the back of your card.
- Follow up with a letter — Write an email or a letter to confirm your cancellation request. State and clarify your reasons for closing the account and request a letter of confirmation that your card has been closed.
- Cut or destroy the card — This makes sure that no one attempts to use the card after canceling it.
Be informed of the things that could happen to your credit history if you cancel a credit card. It is best not to do it if it will increase your credit utilization rate to up to 30%. You can also consider alternatives to canceling, like finding a manageable way to handle your debt or downgrade to a card with a lower or no annual fee.