Some of us are guilty of having unused credit cards taking up precious real estate in our wallets. Perhaps you’ve got an old store card you opened to get a discount on a purchase but haven’t shopped there in years. Perhaps it’s a general credit card that got pushed to the back in favor of your credit cards that earn you rewards.
Whatever it is, you might be looking at your wallet and wondering if you should close that account. Is it better to cancel your unused credit cards or keep them though? That answer greatly depends. If the card in question has an annual fee, you are better off closing it. Otherwise, it might be best to leave it open.
But financial matters are rarely if ever one-size-fits-all. When you do things right, if you close off an unused credit card won’t harm your credit score. In some cases, it can even raise it!
Much of it really depends on what’s going on with the types of credit cards you have. I’ll get into all of that plus how it could benefit you to cancel and when you’ll want to hang onto that card and keep it open, so keep reading!
How Canceling Your Credit Card Will Impact Your Credit Score
If you’re not using a credit card, you might think it’s silly to keep the account open if you’re not using it. In fact, it might prevent you from overspending if you were to close it. At least you’d think so, right?
However, closing a credit card could harm your credit score. How is that possible?
There’s something called ‘increased credit utilization’. This rate is the amount of revolving debt compared to the total credit limit. The lower this rate is, the better your credit. It proves to lenders that you’re capable of spending smartly (and repaying what you spend) and that you can be trusted to be responsible with the credit extended to you. Much like a child that earns an allowance, saves it, and spends it wisely, you’re earning trust from the creditors.
But if you get rid of credit, it affects the credit line total that you have accessible. So, if you have one credit card with a $2,000 credit line and a second card that allows for a credit limit of $3,000, you have $5,000 total credit available. Let’s say you have a total of $1,000 in debt wracked up between the two of these credit cards. In this example, you have a credit utilization rate of 20%.
Now, let’s imagine that you only have that $1,000 on one of those credit cards. It’s on the one with the $3,000 credit limit. You decide that you’re going to close the one with the $2,000 credit limit. When you do that, you’re chopping your available credit line down to $3,000. So, with this ratio for credit card debt, the utilization rate climbs up to 33%.
If you’ve read any of my posts before, one thing I always hammer home is to keep your credit less than 30% and at 33%, even just a little bit over that amount is going to significantly impact your credit score.
Credit utilization should always be kept under 30% at all times with your ideal goal to get as close to zero as possible. Before you close any credit card account, you should assess the situation and see how it would affect your credit utilization rate before simply closing it out.
Now you know why you may have lowered your credit score in the past by canceling credit cards. Indeed, there are times when canceling the card is the best option (which I’ll discuss just a little further below), but in many cases, you’ll want to figure out what is in your best interest. It may be more beneficial to keep the card open to keep your credit line large enough to keep your credit utilization under that magical 30%.
Closing a Credit Card Won’t Shorten the Average Age of Accounts
Some say that closing a credit card will make you lose credit for the entire age of the account. This supposedly harms your age of credit which comprises 15% of the FICO score. Guess what? That’s not true.
Take it from one of the leading experts himself. John Ulzheimer, who worked for both FICO and Equifax, stated that closing a credit card doesn’t take it off your credit reports. As a matter of fact, as long as that card stays on your report, you still get the value of age of that account on the FICO and VantageScore credit scoring models. The only way to make it go away is to have it removed from those credit reports.
So, what Ulzheimer is saying is that you can close accounts all you like but it’s going to stay there on your reports. And that’s where it will stay for up to 7 years if it’s negative, and if it’s positive, you can expect it to be there for about 10 years. For as long as it remains on the reports, whether it’s good or bad, it will factor into your average age of credit. Both open and closed accounts have an impact on your credit score.
But there are definitely reasons why you’d want to cancel a credit card sometimes. You may benefit more from canceling certain cards or in certain situations than keeping the account open. How does this affect you? Keep reading and I’ll explain.
Reasons why you might want to cancel a credit card
In most situations, it won’t benefit you to cancel a credit card. However, sometimes it’s a necessary move you should make that will work out in your favor. When do I recommend canceling a credit card? Read below for the three main reasons I’d cancel.
– Separation or Divorce
If marriage troubles are bubbling over, closing any joint credit accounts while you’re separated or when the divorce is proceeding is best. Remember, a joint cardholder is fully liable for any charges on the account (past, present, and future). Even if your ex would never act of spite and run up tons of charges on the card, it’s best to cut all ties, especially credit ones.
And even if your ex is a good person, they could be a shopaholic. What’s to say they won’t comfort themselves with a little extra shopping and lattes during to make themselves feel better? If they get in over their head and suddenly can’t pay it back, you’re on the hook for that debt too. Even with a divorce decree that says your former spouse bears the responsibility for this debt, the lender will still hold you accountable for the obligation.
– High Annual Fees
When the credit card in question has a high annual fee and you don’t use it, you might want to cancel it. But before you call up to cancel, think about any of the perks that card can give you. Maybe you don’t use it but if it has travel credits or cashback rewards, you might find that annual fee is worth paying.
However, if you have an annual fee on a card you don’t use or aren’t getting benefits from, it might be best to cancel the card. But first, the thing I recommend you do is to call up and ask to speak to a retention specialist. Tell them you’re thinking of closing your account and would like to have the annual fee waived. They might not agree to it, but it never hurts to ask. Many card issuers want your business and will do what it takes to keep you with them so you might find your wishes granted! Read more on what to say and do to get them to waive the annual fee in this post I wrote.
– Too Much Temptation
While some people are able to resist temptation with overusing credit cards, many are not. If you simply can’t resist the urge to buy new shoes that you HAVE TO have even though you have bills to pay, you might consider closing your credit card account.
I think before you go ahead and close it off, you should try stowing your cards in a safe place so you can’t easily access them. So if you habitually overspend at Target, perhaps locking your cards up in a safe place at home is best. Only take the cash you need with you for what you went there to buy so you don’t wheel one of those red carts out to the lot brimming with new shoes, clothes, appliances, rugs, pillows, dishes, and whatever else piqued your interest.
If you can’t resist shopping online, you can try an extreme measure to stop yourself. For one, delete all your stored card info on sites you frequent. This way, you’re not tempted to fill up your online cart with tons of things you can’t afford. Next, take your cards, wrap them securely in a zippered freezer bag and squeeze the air out. Then submerge the bag in water so it freezes into the center of the ice. It’s what the character of Becky Bloomwood in Confessions of a Shopaholic does in the movie. She had to break that ice open to get to her cards. Silly as it is, it’s worth a shot as hiding it from yourself will keep you from overspending and prevent you from lowering your credit score.
– You may get a good 0% balance transfer offer from the lender
There’s yet another thing you can try out. Call up to cancel the card and tell them you want to close your account unless they can give you a 0% balance transfer. It doesn’t always work, but it never hurts to ask. Plus, if you have other cards, it can help you pay off the debt you owe faster without accruing interest on the balance.
Sometimes, those 0% offers aren’t given to existing account holders though. They will reserve those for new customers, so close the account now and see if you can get back with this lender in another 6 months to a year as a new customer to get that 0%. One word of caution though: these 0% offers are getting rarer by the minute so the more accounts you have, the harder it will be to score one.
– Canceling an unused credit card can simplify your finances
Do you have trouble remembering when each bill is due? Can’t figure out how much interest you’ll be paying if you don’t pay off the full balance? If you want to simplify things you may be better off canceling one of your credit cards. But before you do that, try to use the tools available to you to help you manage all your credit cards and bills. A financial advisor can help you see the light at the end of the tunnel.
One thing you can always use is auto-pay so you never forget a bill payment. But if you have too much debt, you’ll need to look at the other tools you can use to help you manage. Make sure you look at every option available before going through with any card cancellation.
How you should approach closing credit cards according to their type
Depending on the type of credit card you want to close, there are different approaches to take. Some are major credit cards while others are merchant or gas cards. Here’s what you should know about how to handle closing each type.
– New or First Credit Card
For those of you that have just started into the credit world and have your first credit card, you should keep it open for a minimum of 6 months so you can start building a credit history. Try to keep good on this card and while I don’t recommend you close it, it really depends on the card. If you do decide to close the account, make sure you keep this one open for now. You can close it when you get another credit card.
– Reward Cards
I really don’t recommend closing a rewards card simply because you may give up rewards you haven’t yet used. When you accumulate rewards or a nice bonus, keep the card long enough so that you can use your rewards. You can also look at the terms for the rewards program your credit card offers you. You may find out that you can transfer your rewards to another rewards program.
– Unused Credit Cards
The more unused credit cards you have, the more likely you could be the victim of fraud. And when you’re not using a card, you may not notice fraudulent charges for a while. Many credit card issuers also deactivate or cancel cards that sit unused for long durations. If you’re going to keep your cards, use them every now and then and keep an eye on your statements. Even if you think the balance is zero, just double check to be sure and report any fraudulent charges immediately.
If for any reason you’d like to hold onto a credit card, you should know that many will close after 12 months of no activity. To avoid having it closed, use that card to buy something inexpensive at least every 3 months so it stays active and open, this could be anything from an iced coffee to a Netflix subscription.
– Secured or Other Cards for Bad Credit
When you’re rebuilding your credit from a bad history, you may have to bite the bullet and take cards that have high interest rates, annual fees, low limits, or security deposits. Sometimes, it’s a combination of many of those. These cards can definitely help you mend your bad credit past, but they’re not ones to hold onto forever.
As soon as you get your credit standing rolling in the right direction, you can close your secured or other bad credit starter card once you’re approved for a better card. Your goal will then be to step up to better and better cards while rebuilding your credit.
– Low Limit Credit Cards
If you have a credit card with a low limit, this is a great one for closing. If you already have other credit cards with higher limits, these are fine to get rid of. They’re not hurting you but they’re not doing you any favors either. Besides, when you have those store credit cards with high interest rates, it makes no sense to spend on them at all unless you’re paying them right off, so you don’t accumulate the interest. And that’s just a lot of extra work. When credit bureaus tally up your calculations for a credit score, those store credit cards carry much less weight. So, if you were suckered into a store credit card to get a discount on your purchase and you haven’t been there since or maybe shop there once per year, it’s not worth it to keep the card. Cancel it!
Alternatives to closing a credit card
Now, you might be the kind of person that likes to hold onto things, and I get that. I really do. Closing your credit card account might not be the right move for you at this time. We all have different situations so if you’re hesitant to cut ties with a particular card, try these tips instead!
– Call the issuer
Ask to talk to a retention specialist about your card needs. They might have another card that can fit your needs better. Most offer downgrades to cards without fees. It’s definitely worth asking about.
– Keep it open
If you’re just not ready to decide yet, you don’t have to break up with your credit card. Keep it open and add a small recurring charge to it to keep it open. Maybe your cheap subscription box? Set the payment to auto-pay so you’re always on time with payments and won’t wreck your credit score.
– Apply for a card you like better
You can also choose to get a card that you would do better with but when you do, make sure the credit limit it has will be high enough to replace the card you’re not using. Say you have a secured card and rebuilt your credit. Cancel that card after getting a better card with a higher credit limit, then collect your security deposit back from the secured card. Don’t forget that if you have a low-limit credit card, store cards, or cards with fees that aren’t worth it, you can and should get rid of those too in favor of a better card.
– Ask your card provider to get the annual fee waived
Let’s say you have a card that charges you $95 for the annual fee. Give them a call (preferably in the morning when the more experienced reps are around), and tell them you don’t want to pay this annual fee anymore. They will likely want to keep you on as a customer, especially if you have been a good and responsible one. In this case, they will probably transfer your account to the kind that doesn’t charge the annual fee, or they may lower that fee. And you may even find if you’re very lucky, you can have that fee waived completely as I detailed in this post.
It never hurts to ask. The worst thing they can do is tell you ‘no’ and according to a survey by CreditCards.com, 70% that asked the credit card company to get rid of the annual fee were able to get it completely waived or lowered.
Always ask to downgrade to a line of credit that is free of annual fees before canceling your card. This works out great for you because it won’t harm your credit score. If you still find after you get rid of that annual fee that you still don’t really like using the card, then keep it anyway. Use it here and there so it remains active. Just don’t forget to pay the bill on time!
Now, if you still want to go through with canceling your credit cards, keep reading to know how to do it right!
10 easy steps to effectively cancel your credit cards
Follow me and I’ll walk you through the 10 easy steps you need to take to cancel your credit cards!
1. Discuss the payoff amount with your card issuer
One of the worst mistakes you can make is to assume that the statement balance you have is everything that you owe. You should ask the issuer for the full payoff amount. That includes the current balance along with any interest and fees too. You have to pay all of it or else it will still keep a balance with interest and fees piling up on it. That is NOT something you want to find out about in a year from now!
2. Redeem your rewards
When you have cashback, points, or any other rewards on a card you want to close, use them up before you close it out. You’ll likely lose those rewards upon the closing of the account. You should always know what the details of the expiration rules are for any loyalty program. It would be a shame to accumulate all those goodies and not get to take advantage of them.
3. Update automatic payments
Automatic payments are a great feature, but if you’re closing your card, you need to switch them to another card or link them to your checking account. Otherwise if you try to pay with the card you close, you’ll wind up missing payments, accruing late fees, or even having service shut off.
4. Let authorized users know you’re closing the account
Let’s say you share the account with your spouse or you authorize one or more of your children to use the card. You need to let them know when you’re closing that account so they don’t try to use the card after it has closed. This could mess them up when they’re trying to do something even as simple as fill up their gas tank. You’d feel horrible if your teenage child was left on the side of the road because they couldn’t use their card to get gas or pay for repairs.
5. Pay off or transfer your balance
If you can, I strongly urge you to pay off the card so you’re done with it completely, including all the interest and fees. But if you are unable to do so at this time, transfer that balance to another card with a lower interest rate. If this is your only card, STOP! Don’t cancel a credit card without securing a new and better account first.
6. Confirm that your balance is zero
You should always double-check after sending that last payment to make sure it was processed and that there is absolutely no balance left on the card. Also, you won’t actually be permitted to cancel a credit card if you have a balance left. You can tell them you want to cancel it but that account remains open and on your credit report until it’s paid off.
But you are allowed to move the balance to a balance transfer card with another lender. Applying for a new card means you get a credit check which comes up on your credit report so get everything in order first before making any sudden moves.
7. Request the closure of your account
Once your balance is zero, you can tell the issuer that you want to completely close out your account. They will likely offer you bonuses and other perks to keep it open. If you truly want to be done with this card, keep to your decision and cancel it.
8. Use a certified letter to follow up for your records
It’s not always necessary, but sending a certified letter to your credit card company is a good way to get it in writing that you canceled your card. This way, should something come up on your credit report, you can support your claims in writing. Tell the issuer you’re closing that account. You want your credit record to show that you’ve requested to close the account. Be sure to ask for a confirmation letter that shows your balance is zero and the account has been closed.
9. Dispute any incorrect information on your reports with the three credit bureaus
Take advantage of the fact that you get free credit reports. If you notice anything that is incorrect on them, take action immediately. This is where confirmation letters can help you be successful in removing information from your records.
10. Get rid of the card
Once the card is confirmed as closed and you’re certain of it, destroy your card. You can cut it up with scissors or use a shredder if you have one.
Closing a credit card account should only be done after you’ve thought things through. Hopefully, my tips above will be useful to you for deciding what matches your situation best. Sometimes, it makes more sense to cancel a card while other times, it’s better to have the account type changed to one that serves you better. Knowing the difference is what will help you build a strong line of credit that you can rely on when you need it.