Canceling Credit Cards: Should You Do It & How to Avoid Credit Score Damage
It’s common for consumers who have old, unused credit cards or who no longer trust themselves to wield plastic responsibly to express interest in canceling their accounts. You might assume doing so to be a no-brainer, but the truth is that in many cases keeping your account active may actually be preferable.
The primary reason why it’s often best to refrain from closing old credit cards, even if you longer use them, is the significance of credit utilization and Length of Credit History to your overall credit score. We’ll discuss the specific credit scoring implications of closing a credit card account in a bit, but in a nutshell, doing so will make it appear as if you’ve started using more of your available credit and may also effectively shorten your credit track record – both of which can make you appear less trustworthy to financial institutions and other decision makers.
That, however, doesn’t mean there aren’t situations in which closing a credit is actually advisable. You can learn more about these exceptions as well as the other dynamics involved with making this decision below.
As mentioned above, there are two things that you should consider from a credit score standpoint before closing an account associated with an unused credit card. The first is how closing that account will affect the amount of available credit you have and the second is how long that account has been open.
The Amounts Owed portion of your credit score accounts for roughly 30% of your overall rating and includes a metric known as “credit utilization.” Credit utilization is a ratio of credit used vs. credit still available that credit scoring companies calculate for each of your individual credit lines and installment loans as well as all such accounts on aggregate. Closing an unused credit card will remove that account’s credit line from your available credit, automatically increasing your overall utilization ratio. Creditors like utilization to be around 30%, so if canceling your card puts you well above that number, it’s probably best not to do so.
The Length of Credit History component of your credit score comprises about 35% of your overall rating. It, as you might expect, details how long you’ve been using credit cards and installment loans, including the age of your oldest and newest open accounts as well as the average age of all such accounts. As a result, closing an unused credit card will definitely reduce your average account age and, depending on which card you plan to cancel, could even throw off the oldest account metric as well.
At the end of the day, it’s impossible to pinpoint exactly how many points your credit score will fall as the result of canceling a credit card account, but it’s certainly not beneficial to do so with all else being equal. Creditors use past performance to predict future outcomes, which means a relatively short track record will make you seem riskier in their eyes, thereby hurting your chances of securing a loan or other financial account in the future. And given the ubiquity and importance of credit scores, you simply don’t want to incur any unintended credit score damage.
Unfortunately, the average consumer is unlikely to understand the credit scoring implications of an act as seemingly innocuous as cancelling a credit card account, according to Dr. Yanbo Jin, an associate professor of finance at California State University, Northridge, who says that "both the financial literacy of an average person AND the complexity of credit scoring contribute to this phenomenon." Some experts are therefore even calling for regulations to require improved disclosures.
“From a consumer psychology perspective, even assuming that financial literacy and the complexity of credit scoring are not an issue, consumers can still make suboptimal decisions when choosing to close a credit card account,” says Dr. Mihai Niculescu, an assistant professor of marketing at New Mexico State University who studies consumer decision-making. “Decision-making processes improve when consumers are made aware that important information is missing or when the additional relevant information is provided. For example, a policy requiring banks to inform the consumer on the potential negative impact that closing a credit card could have on the credit score – by providing the customer not only with the present credit score, but also with a predicted credit score (or credit score range) after the completion of the account closure – would probably improve decision-making.”
By now it should be clear that it’s unwise to cancel a credit card account without carefully considering the potential credit score damage involved. But what if there are extenuating circumstances or keeping the account open is actually costing you money? To be sure, there are some situations in which you should put an old credit card to rest, and we will lay out the most common ones below.
- When the Card Has an Annual Fee: No one likes annual fees, especially when you don’t get anything back in return. So, if you have an unused card that you’re still being charged for on an annual basis, first call the issuer to see if they’ll waive the fee. If that doesn’t work, you may want to close the account, provided that you won’t need the absolute highest credit score possible in the next 6-12 months. Sometimes it’s better to just bite the bullet as early as possible, especially since there are a number of ways that you can improve your standing in order to compensate.
- You Simply Have Too Many Cards: With new promotional offers cropping up on a regular basis, it can be tempting to open a new credit card every so often. But, at the same time, you don’t want to end up with a million different cards and the piles of mail and fraud concerns that accompany them. The best way to keep your credit card arsenal at manageable levels is to close the newest ones that you no longer use.
- During Divorce Proceedings: Couples often have shared credit card accounts, and figuring out what to do with them can be difficult if a relationship comes to an end. Closing the account in question tends to be the answer if it was obtained via joint application, as opposed to one person having added the other as an authorized user to their own individual account. Allowing either or both parties to continue using a joint account will only lead to arguments over who owes what, which could easily result in missed payments and significant credit score damage.
As Part of a Debt Workout Agreement: It’s common for credit card companies to reduce a credit card’s spending limit or to revoke purchasing privileges altogether when the accountholder has not paid the bill in a long time, so as to prevent them from digging a deeper and deeper hole. Many issuers also include ultimate account closure as a condition of their accepting a debt settlement offer or a proposed debt management plan.
In other words, a bank may be willing to reduce your interest rate or monthly payment amount or even forgive a portion of your balance if that will get them some of their money back and prevent them from having to deal with you for the foreseeable future. In this case, the decision to close the account would be out of your hands.
If You’re a Victim of Fraud: This situation speaks to the literal difference between canceling a credit card and closing a credit card account entirely. Those terms are typically used interchangeably, but you can actually cancel, or deactivate, a particular piece of plastic without completely shutting down your account – or, perhaps more accurately, without ending your relationship with the respective financial institution.
For example, let’s imagine that you lose your card or someone gets hold of your account information and begins racking up unauthorized charges. While your current account would be compromised in this scenario, your credit card company can simply close the affected card, rendering it useless to the fraudster, and roll your information into a new account for which you will be issued a replacement card with a new number, expiration date, and CVV code. Doing so will not affect the way your account is listed on your credit reports, and thus no credit history will be lost as a result.
Should you ultimately decide to cancel your credit card account, the good news is that the process is quite simple.
All you have to do is flip your card over, call the customer service number listed on the back, and tell the representative that you wish to close the account. If the physical card is no longer in your possession, you can easily find the issuer’s customer service phone number on its website and they can look up your account number using your SSN. Some people will also recommend mailing the credit card company a cancellation letter just to be sure that your request is noted and does not fall through the cracks, but that’s probably overkill in this day and age.
With that said, there are a couple of things that you’ll need to do before and after you set the cancellation process in motion:
Use All Unredeemed Rewards: Credit card company policies make it almost impossible to get back unused rewards once the cancellation process begins, and you can’t count on the customer service representative to warn you ahead of time either. That’s why leaving rewards value on the table is one of the most common mistakes that consumers make when closing unused credit card accounts.
Make Sure There is No Unpaid Balance: You can’t completely close a credit card account with an unpaid balance, as the terms of your agreement with the issuer won’t be satisfied until all amounts owed are repaid. This can be a stumbling block for many consumers given the confusing way in which credit card billing works. Even if you paid the full amount listed on your last statement, there could still be a small balance remaining if interest accrued between your statement date and when you paid the bill. It’s therefore always best to check your online account management page and confirm that you have zero balance with a customer service representative before requesting closure.
- Verify the Change is Noted on Your Credit Reports: About two months after you close your account, exercise your right to a free copy of one of your credit reports to make sure the trade line in question is marked as “closed.” If it’s not, the cancellation might not have gone through due to some mistake on the credit card company’s end, and you’ll need to notify them of the error.
Once you’ve cancelled your account, you may also want to cut up your card before disposing of it in order to mitigate any potential fraud.
“Investing in a shredder is one of the best $25 investments someone can make,” says Christopher Browning, an assistant professor in the Department of Personal Financial Planning at Texas Tech University. “Even if a credit card is expired and can’t be used to make purchases, simply throwing it away makes information that is potentially sensitive available for someone to use is a harmful way. Even beyond credit cards, any document that contains personal information that has the potential to be used fraudulently should be destroyed.”
While you may assume that closing a credit card account is an innocent – and perhaps even beneficial – act, doing so can actually damage your credit standing by artificially increasing your credit utilization and shortening the length of your credit history. You obviously don’t want to take an unnecessary credit score hit, so be strategic about which cards you decide close, have a clear purpose for doing so in mind, and time the closure so that the short-term credit hit you take does not have a domino effect.
Keep in mind that if your desire to cancel your card stems from the belief that it will lead you to overspend, you can always just cut it up! That will eliminate temptation without hurting your credit. Alternatively, you could request that your spending limit be reduced. This may have a slight impact on your credit score by reducing your available credit, but if it prevents overspending while allowing you to keep your account active and reporting to the major credit bureaus, it might be worth it.
“Credit limits offered on cards are not endorsements for how much individuals can afford to spend. Lowering the limit for someone who is prone to overspend will restrict their ability spend beyond their means, while also making credit available to build the credit score and protect against minor emergencies,” Browning says. “Doing something as simple as matching the credit limit to available reserves is a practice that will significantly reduce the likelihood of spending beyond one’s means, while also providing beneficial access to credit.”
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