How to Cancel a Credit Card Without Hurting Your Credit Score

Closing a credit card might seem straightforward, but did you know it could potentially harm your credit score? If you're considering canceling a card but cringe at the thought of a lower score, you're not alone. Understanding the right steps can help you close that account while keeping your credit score intact.

Key takeaways

• Closing a credit card can affect your credit utilization ratio, which plays a significant role in your credit score
• Pay off your balance and cancel all recurring payments before closing your account
• Alternatives like negotiating better terms or switching cards may be better options than canceling

Understanding the effect on your credit score

Before you cut up that card, it's crucial to understand how canceling it can affect your credit score. Did you know that your credit utilization ratio accounts for 30% of your FICO score?

Your credit utilization ratio is determined by looking at your “revolving” lines of credit. If credit cards are your only revolving lines, this ratio is calculated by dividing your total credit card balances by your total credit limits.

For example, if you have $5,000 in balances and $20,000 in total credit limits, your utilization is 25%. Closing a card with a $10,000 limit would reduce your total limits to $10,000, spiking your utilization ratio to 50%. This significant change can hurt your credit score.

Closing a credit card can also affect your score by reducing the average age of your accounts. Your credit score is partly determined by your length of credit history, which accounts for 15% of the total. If possible, try to avoid closing credit cards that you’ve held for a while, since doing so can drag down your average account age.

Valid reasons for canceling

Sometimes, canceling is the best option. Here are some valid reasons to proceed:

• High annual fees that don't match the benefits.
• Poor customer service experiences.
• A card that tempts you to overspend.
• Joint accounts during a divorce or separation.
• Unused store credit cards with low limits.

Steps to cancel a credit card safely

1. Pay off the balance

First things first: ensure your balance is paid in full. Credit card issuers usually require a zero balance before processing a cancellation. Don't forget to account for any pending charges or interest that might not have posted yet.

2. Cancel recurring payments

Got automatic bills hitting that card? Switch all recurring payments to another card or payment method. Skipping this step could lead to missed payments, late fees, or even account reactivation without your knowledge.

3. Redeem rewards

Why lose out on perks you've earned? Redeem any unused rewards, points, or cash back before closing the account. Once the card is closed, you could forfeit these benefits.

4. Contact the issuer

Now, it's time to make the call. Reach out to your credit card company to initiate the closure. Confirm that your balance is zero and request a confirmation of the account closure for your records.

5. Follow-up and verification

After the call, it's a good idea to send a follow-up letter or email to document the closure request. Then, check your credit reports after about 60 days to ensure the account is reported as closed.

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Considerations before canceling

• Credit utilization matters: Think twice before closing cards with high credit limits. Keeping your credit utilization ratio low—ideally under 30%, or even 10%—is key to maintaining a healthy credit score.
• Age of the account: The length of your credit history affects your score. Older accounts contribute positively, so closing them could shorten your average account age and ding your score.
• Alternative options: Not happy with the card? Consider negotiating for better terms or switching to a different product with the same issuer. This way, you maintain the account history without losing out on potential benefits.
• Think about your credit mix: Your credit score also factors in the types of credit accounts you have, like credit cards, mortgages, and installment loans. Maintaining a diverse credit mix can positively influence your score.

Alternatives to canceling your credit card

Before you decide to close your card, here are some alternatives that might be beneficial:

• Downgrade to a no-fee card: If high annual fees are the issue, ask your issuer if you can switch to a card without an annual fee.
• Use the card occasionally: Keeping the card active by making small purchases can prevent the issuer from closing it due to inactivity.
• Set up balance reminders: If overspending is a concern, set up alerts to monitor your spending levels.

TuitionHero Tip

Did you know that the highest FICO scorers use less than 10% of their available credit? Keeping your utilization low can boost your score over time!

Why trust TuitionHero

At TuitionHero, we provide tools to help you manage your credit effectively, including guidance on canceling credit cards without hurting your credit score. Explore our resources to maintain a strong financial foundation.

Frequently asked questions (FAQ)

How does closing a credit card affect my credit score in the long term?

Closing a credit card can have a long-term effect on your credit score by reducing your available credit and potentially increasing your credit utilization ratio. Additionally, it can shorten the average age of your credit accounts, which may lower your score. However, it may also reduce the temptation to overspend, making it easier to keep up with debt payments.

Can I reopen a closed credit card account?

Reopening a closed account depends on the issuer's policies. Some banks may allow it if the account was in good standing, while others may require you to apply for a new card. It's best to contact the issuer directly for specific information.

What happens to my rewards if I cancel my credit card?

If you cancel your credit card without redeeming your rewards, you may lose them. It's important to redeem any unused rewards before closing the account to avoid forfeiting them.

Should I close a credit card if I'm not using it?

If the card doesn't have an annual fee and is not tempting you to overspend, it might be wise to keep it open. An unused card contributes to your overall credit limit and helps maintain a lower credit utilization ratio.

Final thoughts

Canceling a credit card doesn't have to be a credit score disaster. By understanding how credit utilization and account age affect your score, and by following strategic steps, you can close your card with minimal impact. Remember to pay off your balance, cancel recurring payments, and consider alternative options before making your final decision.

Source

• Understanding Your Credit | Consumer Advice
• Dispute errors on your credit report | USAGov
• Credit Reports | FDIC