If you’re thinking about closing a credit card account, it’s probably for one the following reasons:
- You worry that possessing a credit card could tempt you into spending too much money.
- You’re tired of the high interest rates or annual fees. (Tip: you could try to negotiate a lower rate first.)
- You found a different credit card that gives you a better deal.
Closing a credit card won’t hurt your credit, as long as you do it the right way.
So if you’re thinking about canceling a credit card, just make sure that you follow the 4 steps below.
If you take a shortcut – like cutting up the credit card (so you cannot possibly use it anymore) or freezing the credit card (to keep yourself from being tempted to use it) – you could end up hurting your credit.
3 Ways Closing A Credit Card Affects Your Credit
#1 – The ways that credit bureaus use your financial behavior to gauge your credit can be somewhat confusing:
- If you decide to keep a credit card active, the positive information attached to it stays on your credit report indefinitely.
- If you close a credit card, all of the positive information attached to it remains and gives your credit score a boost for only 10 years.
This is worth taking into account before you rush to close a credit card.
#2 – Your balance-to-limit ratio is affected when you close a credit card.
Your credit score, in part, depends on your balance-to-limit ratio.
This is where the credit bureaus:
- Add up your spending limits on all of your credit cards.
- Total up how much you’ve spent on those credit cards.
- And set them against each other to arrive at a number, which they call your balance-to-limit ratio.
If the credit card you’re closing happens to have a large spending limit, then closing it could abruptly raise your balance-to-limit ratio unfavorably.
The only way to close a credit card without affecting the ratio is to pay off all your other credit cards first.
#3 – The age of the credit card you’re closing matters, too.
The longer you have a credit card, the more meaningful it is to the credit bureaus.
Your handling of that credit card over the years gives them some valuable insight into how dependable and reliable you are at managing your money and making payments.
By closing a long-standing credit card, you could potentially hurt your credit score. It would be most damaging if you’re young and you don’t have much of a credit history to fall back on.
How To Cancel A Credit Card Without Hurting Your Credit
If you feel that closing a credit card makes the most sense for you, make sure you follow these 4 simple steps:
- Pay the balance off in full first. It’s important to keep documentary evidence showing that you paid the balance in full.
- Sometimes, on credit cards with large sums outstanding, you can accrue additional residual interest in the couple of days it takes the bank to credit your payment to your account. So, a few days after you pay off the balance, call the phone number on your credit card to make sure that your balance is indeed zero.
- Once they’ve verified that your balance is zero, tell them that you wish to cancel your card immediately. They may protest and try to hard-sell you on a better credit card deal. If you are convinced that your card has to go, you need to remain firm. Ask the rep for the credit card issuer’s mailing name and address so you can mail them a letter confirming that you want to cancel this credit card.
- It’s important to write a letter by snail mail because customer service reps often make mistakes and leave credit card accounts open — even after telephone requests to close them. In a short 3-sentence letter, ask them to post a note on your account indicating that it was “closed at the request of the customer.” (This is important because if the credit bureaus think that the card was closed by the bank, then your credit score could take a hit.) Also include documentary evidence showing that you’ve paid the balance in full. Make a copy of this letter before you send it.
What To Do After You’ve Closed A Credit Card
It could take 4 weeks or more for the credit card to officially be closed. You should eventually receive a written letter from the credit card company verifying that they’ve closed your account.
Keep copies of everything associated with this credit card for at least 1 year after the account is closed.
- If the account seems closed, then request a FREE copy of your credit report just to make sure that the account has been closed properly.
- If the account doesn’t seem closed, then call the credit card company again & get to the bottom of it.
Closing a credit card the right way does take a little time and effort, but pays off in the end!
With input from Financial Advisors, (a Tax Accountant and an Investment Manager), I share helpful tips regarding money and finances — including debt relief, insurance, budgeting, and investing for retirement. My goal is to help you save more, spend less, and invest for the future by sharing honest, tried & true budgeting tips and tools. When I'm not saving for the future and helping others save for theirs, you can find me at the corner of Good News & Fun Times as publisher of The Fun Times Guide (32 fun & helpful websites).