More credit Q&A: “Should I close my credit card?”
So you’ve decided you don’t want your credit card anymore. You don’t use it and it just sits around in your wallet. Either that, or you’ve got spending habits that are out of control and you just want to pay off the credit card and close the account. After all, you already cut up the card, might as well close it too, right?
You decide to make the phone call to close the credit card account. You contact customer service and ask them to “cancel your credit card.” They place you on hold for a while, then transfer you to the appropriate department. You speak with a specialist regarding the closure of your card.
They ask a few questions, such as why you’re closing the account, were there any problems, etc. You say no and just try to rush the process along. After throwing some special offers your way, they finally concede and tell you the closure request has been processed and should be taken care of and noted on your credit report within 30 days.
But before you go through with it, it’s important to understand the implications of canceling your credit card.
Implications of Canceling Your Credit Card
First, if you plan on applying for any new credit shortly after or during the time of credit card closure, note that your credit score will likely drop as a result of canceling the credit card.
You will essentially lose out on “x” amount of available credit that the canceled credit card was contributing to your credit utilization ratio.
So if your now-cancelled credit card had a credit limit of $10,000, that’s $10,000 less that you have available. That diminishes your borrowing power, and drops your credit score, at least in the near term.
Not only that, but you’ll effectively reduce your credit depth by canceling a credit card that may have had several years of positive credit history associated with it. Remember, most lenders want at least three open lines of credit with two-year history on each.
So if you only have new credit cards, you may run into trouble in the future when applying for a car lease or a mortgage.
Secondly, if you cancel your credit card with a balance outstanding, the creditor can charge you a penalty or raise your interest rate to the maximum available. So be sure you want to cancel the card before you tell any of the credit card representatives about your intentions. And make sure you have the money to pay it off in full.
If you aren’t carrying a balance, the opposite is true. Tell the creditor that you plan to cancel your credit card and watch the offers get thrown at you. Many creditors will offer lower APRs, better rewards, card upgrades and more, just to keep you as a client!
Even if you plan on keeping your credit card, making a veiled threat is a great way to improve your benefits. Just make sure you don’t have a balance, or you could be penalized as mentioned above.
It’s Okay to Close Your Credit Card Account
Lately, I’ve been getting agitated by all the media attention surrounding credit scores and the negative impact of closing a credit card account.
It seems every article out there detailing the latest credit card woes, such as cut credit lines and increased minimum payments, also warns customers about closing their accounts, as if it’s credit score demolition.
I wanted to address this issue because there are a lot of people out there that make it seem like you should never, ever close credit card accounts.
Unfortunately, this seems to benefit the credit card issuers more than consumers; after all, if we can’t close our credit card accounts, there’s a decent chance we may use the cards in the future and run into trouble.
Let’s get real for a minute here; if you don’t use a certain credit card and you’ve got numerous open accounts with positive credit history on them, it’s okay to ditch a credit card or two.
In fact, I recently closed two credit card accounts that I hadn’t used in a year, as I had about six other active credit cards.
Sure, my available credit will drop as those lines of credit are no longer at my disposal, and my credit utilization rate will rise as well.
By keeping credit card accounts open, you keep the history of the card active, and the available credit balance is counted in your overall credit profile.
But this isn’t always a negative. You see, I’ve got plenty of good history on my other credit cards and I keep balances low to nil, so it’s not a concern for me.
And hey, even if I hadn’t closed those credit card accounts, they may have closed anyways by the card issuers themselves. Chase actually closed one of my credit card accounts without notifying me, presumably for complete inactivity for several years.
I didn’t really care. In fact, they saved me the trouble.
When It Could Hurt Your Credit Score
Now let’s look at the other side of the coin; if you don’t have much credit history or you’re in the process of (or plan to) apply for a loan, it’s best not to tinker with your credit card accounts. At all…
Closing a credit card account can lower your credit score for reasons I mentioned above, so it’s best not to mess with it during crucial times like applying for a mortgage or auto loan.
Many mortgage lenders require prospective borrowers to have 3 active tradelines with a two-year history on each. Imagine if you had three, but closed one recently. And were then denied a loan.
It’s also not advisable to close a credit card account if you’ve only got one or two, as you may need those accounts to build positive credit history, or heck, buy lunch.
Similarly, if you have credit cards with years of history, it’s probably best to keep them open and active, and close newer, less valuable accounts with little payment history.
Your credit score can actually take a hit if you’ve got too many credit cards (why is my credit score low?).
So if you think that might describe your situation, and you’re interested in closing one or two, start with the ones with the least amount of history, or perhaps the ones with the most negative information.
Let’s Set the Record Straight
I think it’s gotten to the point where Fair Isaac, the creator of the FICO score, should step in to address the matter. They should at least tell consumers it’s okay to close their accounts, and that the impact will be relatively minimal if they have other accounts with decent associated credit history.
Obviously, if you’ve got only two credit cards and one is maxed out and the other is free and clear, it’d be wise to keep the latter one open so it doesn’t look like your entire credit profile is maxed out.
But if you’ve got seven credit cards, five of which are free and clear, it’s okay to close a few. Cancel away…it shouldn’t hurt your credit much or at all. And even if it does, it should be temporary, because it’s not a “negative” event like a missed payment.
Tip: If you have limited credit history, keep your credit cards open, and try to link each one to a monthly payment you make, such as a cell phone or cable bill. Then pay it off in full each month. This will keep the card active and build positive credit history.
Even if the APR is high and you’ve got low interest credit cards that you normally use, it can still benefit your credit score.
Just understand that you do not need to carry a balance to improve your credit score!
Before You Cancel, Ask for a Retention Bonus!
One last item I want to cover. If you’re looking to cancel a card, don’t just use the automated system. Take a moment to speak to a live customer service representative to determine if there are any “retention bonuses” that might be available if you remain a customer.
For example, if you keep the card open, they may waive the annual fee, give you bonus points, or give you a new spending-related bonus to get the card out of your wallet again.
Some of these retention bonuses can be pretty lucrative, and it’s just a phone call to see if you qualify. Might as well see what they throw at you before you throw out your card!
Tip: You can also ask them to downgrade your card to the no-annual fee version, if it exists, or to a comparable (or lesser) card that doesn’t charge an annual fee. This is one way to retain your credit history and average age of accounts to eliminate any negative credit score damage!
Key Takeaways About Closing Your Credit Card Accounts
- It’s okay to close your credit cards!
- It will have some kind of credit score impact, but it could be minimal
- Closed accounts mean less available credit, which can hurt your score
- Closing credit cards with larger credit limits can do more harm
- If you’re paying off the debt while closing the account, it can help you
- Closing older cards can hurt more because it shortens your average credit age
- Closing a credit card while your other cards have balances can be more harmful
- Thinner file consumers (less credit history) will likely be impacted more negatively
- Get documentation when closing an account because there have been cases where the cards are never actually closed!
- Also note that the credit cards can generally be reactivated within six months of cancellation
- Closed credit cards remain on your credit report for 10 years
Keeping Credit Cards Open Can Be Helpful
I personally recommend keeping credit cards open if they’ve got decent lines of credit, no annual fees, contain lengthy clean payment history, and don’t have outstanding balances resulting in finance charges.
The total amount of available credit and the card history are good enough reasons to keep the card open.
If you wish to pay off a card or avoid paying finance charges, try a credit card balance transfer. This allows you to keep the credit card open, pay it off completely, and avoid interest charges as you move it to a new, 0% APR credit card.
That being said, don’t be afraid to close a credit card if you’ve got too many and they’re not being used. Sometimes too many credit cards can lower your credit score and may increase your identity theft risk if not properly managed.
Read more: How many credit cards should I have?