Canceling a credit card might seem fairly simple; if you want to do so safely, it takes some planning and execution. Whether you’re looking to work on your financial habits, avoid fees, or simply streamline your credit portfolio, knowing how to go about it can help you safeguard your credit score and prevent out-of-nowhere problems. In this, we will take you through each step in the process, highlight common problem areas, and provide problem-solving advice.
Understand Your Reasons for Canceling Credit Card
Before your card cancellation journey, however, think about what you hope to achieve by canceling your card. Some common reasons include:
High Fees: Annual fees or other ongoing expenses that seem no longer warranted given the benefits.
Debt Management: Avoid the urge to overspend and take control of your financial future.
Better Rewards: Transferring to a greater rewards card or with decreased interest rates.
Fraud Concerns: Avoiding any fraud or security issues.
Knowing your motivation will help you plan how to cancel and make sure you’re not making a mistake.
Credit Utilization
Cancelling a card can lower your total available credit, raising your utilization ratio if you have a balance on other cards.
Credit Utilization Ratio
Your credit utilization ratio is the amount of your available credit that you are currently using. So if your total available credit is $10,000 and you owe $2,000, you would have a utilization of 20%.
Impact of Canceling a Credit Card
When you cancel a credit card, the total amount of credit available to you goes down since that card’s limit is no longer factored in. But any balance you owe on your other cards doesn’t change right away. This means the same amount of debt is now a larger percentage of your lower total credit limit, which raises your credit utilization ratio.
Connection to Your Credit Score
Credit utilization is one factor used to calculate your credit score, and it usually makes up about 30% of the overall score. If your utilization ratio increases substantially, meaning you use more of your available credit, it can cause your credit score to drop.
Credit History
An older credit card helps with the length of your credit history. If you lose it, it could lower your credit score a little.
Credit History Length and Its Importance
About 15% of your credit score is determined by how long you’ve had credit. In general, a longer credit history tends to be a good thing, since it gives lenders more information on how you handle credit over time.
How Credit History is Calculated
Credit bureaus consider several factors when assessing the length of your credit history. This includes:
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- How old is your oldest account?
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- How old is your newest account?
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- The average age of all your credit accounts.
Impact of Canceling a Credit Card
When you cancel a credit card (especially if it’s been open for a long time), you lose one of those data points. This can bring down the average age of your accounts. Suppose the card you’re canceling is also your oldest account.
In that case, the hit is even worse since you would be eliminating the longest history you have of showing responsible credit use, which usually hurts your credit score.
Tip: If your credit score is a big deal for you and you don’t need the account, you might keep it open and just leave it with no balance instead of canceling it right away.
Reasons to Consider Canceling a Credit Card
High or Unjustified Fees
Consider if annual fees, maintenance fees, and other expenses can outweigh the benefits of the card.
Poor Rewards or Benefits
If the rewards program or perks aren’t worth the fee or you can obtain better rewards through another card, consider canceling.
Overspending and Debt Management
Cancelling a card can help curb spending if you’re having difficulty controlling your overspending or accumulating high levels of debt.
Substantial Fees
While some credit cards have steep annual fees (such as premium travel cards or cards for people with lower credit scores), others have reasonable fees or none. If the fee you pay is not aligned with the benefits or rewards you receive, it can be smart to cancel the card.
Impact on Credit Utilization
Think about the impact on your total available credit and how it might send your credit utilization ratio spiking, which could hurt your credit score.
Spending Control
Credit cards are good for getting your credit history, but also bad for spending too much and getting in debt if not monitored. If you’re working to stay on budget and pay down debt, canceling a card may help you rein in your spending.
Lifestyle Changes or Financial Goals
Events in life, like a divorce or a drastic shift in financial priorities, might require you to streamline and rearrange your finances.
Security Concerns or Fraud Issues
If a card is frequently a target of fraud or you have fears about data breaches, canceling may be a smart decision.
Redundancy in Your Wallet
A large number of credit cards can be challenging to manage. If you have a complex credit portfolio, you might want to simplify things to stay organized and financially disciplined.
Steps to Safely Cancel a Credit Card
Review Your Account and Balance Due
Look for Pending Transactions: Next, check for any pending transactions before you cancel so that you do not face any surprises post-cancellation.
Clear Your Balance: Avoid surprise interest or fines by paying off any existing balance.
Redeem Rewards & Benefits
Use or Transfer Rewards: Make sure to redeem any points, cash back, or miles before you cancel, as those perks may expire or be lost when you cancel.
Update Linked Subscriptions & Automatic Payments
Identify Recurring Charges: Note down all services/subscriptions associated with the card.
Change Payment Methods: Update payment information on all providers’ websites to prevent service loss or missed payments.
Contact Your Credit Card Issuer
Calling customer service and expressly stating that you want to cancel your account.
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- Request Confirmation: Request a cancellation confirmation number or written confirmation to provide documentation of the process.
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- Prepare For Retention Offers: Expect to hear about offers to keep the account. If you are sure you want to cancel, say, No, thank you.
Follow-Up in Writing
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- Sending a Cancellation Letter or Email: Follow up with a written notice simply stating that you want to cancel, providing your account details, and repeating what was agreed to in the call.
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- Maintain thorough records: Retain copies of all communication (including direct messages) if you need to dispute anything later.
Monitor Your Credit Report
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- Verify for Accuracy: Once cancelled, request a copy of your credit report to ensure the account is listed accurately (like “closed at your request”) and that you’re not showing payment errors.
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- Make Use of Credit Monitoring Tools: Use credit monitoring services to follow your score and notify any deviations in real time.
Key Takeaway
The safe cancellation of a credit card involves several steps and is more than just a phone call. Paying off your balance, redeeming rewards, updating payment methods, and checking your credit report can help you avoid potential pitfalls and protect your financial health. Problem-solving in real-time and proactive communication with your issuer play critical roles in ensuring a seamless transition.
Cancelling a credit card doesn’t have to be a scary process if you follow these steps. If you plan well and pay attention, securing your finances will give you the confidence to move ahead.
