Perhaps you’re considering canceling a credit card account to avoid the annual fee, or perhaps your credit card doesn’t offer rewards that fit your lifestyle. Before you close a credit card account, learn why doing so can harm your credit score. But first, let’s answer the question, ‘Is it bad to cancel a credit card?’
Is It Bad to Cancel a Credit Card?
Canceling a credit card can reduce your credit score. If you are new to credit and/or have few cards, the impact will be greatest.
A lower credit score may make it more difficult to qualify for an apartment, a loan, or another credit card, especially if your credit score is close to the lender’s cutoff. The possibility of losing credit score points does not mean you should never cancel a credit card, but it does mean you should plan ahead of time and make wise choices.
Is It Bad for Your Credit to Cancel a Credit Card?
Canceling a credit card, especially one you’ve had for a long time, may have a negative impact on your credit score. Payment history amounts owed, length of credit history, new credit, and credit mix are the five major factors that influence your credit scores. Canceling a credit card could have an impact on each of these factors, and thus your credit scores.
Let’s see how canceling a credit card affects each of these major credit factors.
#1. Payment History
Making consistent on-time and full payments is a common way to use a credit card to build credit. If you are able to do so, this can be a simple way to improve your credit.
On the other hand, if you believe you will have difficulty paying off your monthly balance in the long run, closing the card may protect you from future activity that will harm your credit. However, if you have a balance on your card and want to close it, you must first discuss your options with your issuer.
#2. Amount owed
Credit bureaus keep track of how much money you owe on your accounts to make sure you’re not using up all of your available credit. This percentage, known as your credit utilization rate, compares the amount of money you owe to the amount of credit you have available to you. A lower rate is usually preferable.
If you can only afford to make the minimum payment each month and carry a balance, your credit utilization rate will remain high, potentially harming your credit scores.
However, closing your credit card may aggravate the situation if it significantly reduces your total available credit. If you plan to cancel a card without opening another line of credit, your credit scores may suffer.
#3. Length of credit history
A longer active credit history is generally beneficial to your credit. Lenders prefer to see that you have a track record of effectively managing credit over time.
However, when you close a credit card, it stops aging and cannot grow. This will reduce your active credit history for at least as long as it takes to establish another account.
If the card you’re considering closing was also your first credit card, we strongly advise you to keep it open even if you rarely use it. It will have the greatest impact on the length of your credit history because it is your oldest line of credit.
#4. New credit
When you apply for a new credit card, your credit reports may show a hard inquiry. This indicates that the lender checked your credit before approving your account.
If you close your credit card to open a new one, it will not affect your new credit. This may appear to be a sensible approach if you feel more comfortable using only one credit card at a time.
We don’t want to discourage you from applying for a new credit card that is better suited to your needs and habits. However, you should be aware that the new credit card application will result in a hard inquiry, which will have an immediate impact on your credit scores. If you proceed with that application while also closing your old account, the impact could be significant.
#5. Credit Mix
Lenders prefer to see that you can manage both revolving credit (such as a credit card) and installment credit (like a loan with a fixed payment every month).
If you consider closing your only credit card and not opening another, you may end up removing all revolving credit from your credit reports. In that case, lenders will be unable to assess your credit history and may be less willing to work with you.
Reasons to Cancel Your Credit Card
Credit card cancellation is almost always a bad idea. However, there are some situations in which a card cancellation may be in your best interests. Here are three examples.
#1. Divorce or separation
During a separation or divorce, it is best to cancel any joint credit card accounts. You will be liable for any past or future charges made on the account as a joint card. It’s not uncommon for a vengeful ex to rack up excessive charges on a joint credit card.
If this occurs, or if routine spending on a joint account occurs after separation, the charges will be your responsibility as well. Your divorce decree may state that your former spouse is responsible for the debt, but this does not relieve you of your obligation in the eyes of your lender.
#2. Expensive annual fees
If your card company charges you a high annual fee for an account you don’t use, cancellation may be in order. However, if the account provides benefits that outweigh the annual fee, such as travel credits and perks, it may be worth the cost.
Another story is an annual fee on a credit card that you don’t use or benefit from.
Before you cancel your credit card, contact your card issuer and request that the annual fee be waived. Make it a point to mention that you’re thinking about closing your account. It doesn’t hurt to inquire, and you might be surprised.
#3. Too much enticement
Some people find it difficult to resist the temptation to use credit cards. While this may be a valid reason to cancel a credit card for some, there are other ways to cut back on spending without jeopardizing your credit score.
You could, for example, take your credit cards out of your wallet and store them somewhere safe. You may find it easier to resist the temptation if your cards are not readily available.
How to Cancel Your Credit Card Forever
If you’ve exhausted all of your options and still want to cancel a credit card, here are the steps to take.
#1. Pay off any outstanding credit card balances.
Consider canceling your card for a clean break. The last thing you want is to owe money on a credit card that you must continue to pay for even after you cancel it.
#2. Cancel recurring payments.
Make sure to update your payment information if you’ve set up any recurring payments for your bills.
#3. Determine whether you need to redeem your rewards.
Rewards may expire after your card account is closed, so read the terms of your program to see if you need to use your rewards before canceling. If you’re struggling to get out of debt and have rewards, you may be able to redeem them for a statement credit to help you pay off your balance.
#4. Contact your credit card company.
The customer service phone number should be on the back of your card. To begin, inform them that you wish to cancel your credit card.
#5. Go to the website for your credit card.
If you don’t want to speak with customer service over the phone, you may be able to cancel your subscription online after logging into your account.
#6. Write a follow-up.
After you cancel, it’s a good idea to send an email or write a letter to your credit card company to confirm the card. If there is an error and your card is still active, you can document the date you requested the cancellation.
#7. Check your credit reports twice.
If you don’t want to take your credit card company’s word for it, you can check your credit reports to ensure that your card has been closed.
#8. Cut it up.
A simple but critical step. Cutting up your credit card can help ensure that no one uses it after it has been closed.
Is It Better to Cancel or Keep Unused Credit Cards?
If you currently use your credit card for everyday expenses, canceling a card may cause you to change many of your habits. Even if you have other credit cards, it’s a good idea to consider how you’ll pay for things after you cancel your card.
For example, if you use your credit card to pay for day-to-day expenses at grocery stores, restaurants, and gas stations, you’ll need to find a new payment method. If you previously used your card at those locations and earned rewards, you may be missing out on similar benefits in the future. If you intend to use another card, investigate its features to determine whether it is an equally good option.
You may, on the other hand, have already decided that you prefer to pay with a debit card, check, or cash. However, each of these options has its own set of uses and potential issues, so think about what the future might look like before taking action.
Even if closing a credit card won’t have a significant impact on your lifestyle or credit profile, it may be easier not to cancel the card. In fact, there are several alternatives that may prove less risky.
#1. Insert the card into a drawer.
Perhaps you’ve decided that you don’t like using credit cards. If this is the case, instead of closing the card, consider keeping it and putting it away. This may seem obvious, but keeping the account open while removing the temptation to use the card may be a simple way to keep the card without damaging your credit.
#2. Find another way to deal with mounting debt.
If you’re trying to get out of credit card debt and don’t want to add new payments, you might consider negotiating with your issuer to close the card account. However, a balance transfer credit card or personal loan may be able to help you pay off your debt. These options may provide a more manageable method of debt repayment.
#3. To avoid an annual fee, downgrade your card.
If you have an annual fee on a card you don’t use, you could ask your credit card company to keep the account open while downgrading you to a card with no annual fee.
Is It a Good Idea to Close a Credit Card With a Zero Balance?
Closing a credit card with a zero balance is not a good idea if the card has no annual fee. Any credit card you manage responsibly, even if it is unused, has a positive impact on your credit history. As a result, closing such a card will have a negative impact on your credit score. However, it may be worthwhile if your card is valuable or if you’re concerned about falling victim to fraud if you don’t keep a close eye on it.
Conclusion
Closing a credit card is a personal decision that should be made only after considering the impact on your credit score. Do the advantages outweigh the disadvantages of lowering your score? Once this is established, your decisions will be based on your needs and financial situation.
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