How to cancel a credit card
The first step in any credit card reduction strategy is to reduce your outstanding debt.
Last year, personal-finance writers focused a lot on financial defense of credit, credit reports and credit scores. They're a cornerstone of modern financial life, whether you like it or not.
During that time, many card issuers canceled cards, reduced credit limits, and otherwise reduced their overall financial risk. With rampant foreclosures and sinking home prices, issuers were scared. Some even started cutting people based on where they shopped.
Now that the economy has begun to recover, many people don't want to be in the position they were in a year ago -- feeling as though the card issuers held them and their credit scores hostage. The easiest way to do this is to reduce how much credit you use, and the quickest way to do that is to cancel credit cards.
How do you cancel a credit card without significantly hurting your credit score?
Don't do it. If you are planning to buy a home or car (or otherwise need a loan) in the next year, avoid any changes to your credit unless you're fixing an existing problem. If you aren't planning on a large loan in the next year or two, a little financial housekeeping might be in order. You won't help your score by canceling cards, but you could simplify your financial situation and that always helps.
Pay down debt. The first step in any credit card reduction strategy is to reduce your outstanding debt.
The main reason canceling a credit card is bad for your credit has to do with credit utilization. Credit utilization is your outstanding balance divided by your total credit limit across all debts. A higher number means you're using more of your existing credit, which is a bad thing that reduces your credit score. Canceling cards decreases your total credit limit, thus increasing your utilization without increasing your risk -- all you did was cancel a card.
However, if you have little or no outstanding debt, then your credit utilization number can't go up significantly.
Cancel newer cards first. The second reason why canceling a card can hurt your score has to do with the average age of your accounts. This is less important than credit utilization but if you have a choice, cancel the newer cards first. If you have two cards to choose from and the newer one offers better rewards you will use, then cancel the older one. You want to pick the card that fits your needs; you don't want the credit score industry to do it for you.
If you aren't sure which card is newer, you can review your credit report to find out how old an account is.
Convert or consolidate cards. If you have two cards from the same issuer, consider consolidating credit lines. Ask to have the newer line consolidating into the older line. This, in effect, cancels the newer card but does not affect your credit utilization because your total credit limit remains the same. This is the best result you can have when canceling a card because you keep the total credit line and you increase the average age of your accounts.
Likewise, if you prefer the newer card's rewards, consolidate the credit limits and then ask to have the old card converted to the newer one. This can get a little tricky because you want a conversion that doesn't require a credit check (which hurts your score) and you don't want a new account. If you request this, be clear with the customer-service representative that you don't want to cancel your old card and open a new one -- you just want a conversion. Some issuers will do this; others won't.
Call to cancel. When you cancel your card, be sure to ask the credit card company to report the closure as "closed at the customer's request" and to send you written confirmation. You'll need to confirm that the information appears on your credit reports and retain the letter in case there is a dispute. You don't want your credit report to say "closed by creditor" because that looks bad.
Canceling a credit card account can be tricky but, as you've just read, there are only a few moving parts to keep an eye on. In the end, you need to do what makes sense for you, and I've laid out all the potential land mines along the way.
We've been trying to simplify our finances for the last year, consolidating cards, canceling bank accounts, and otherwise just keeping our books a little smaller. In that time, I've learned that there may be a lot of pitfalls but they're easy to navigate.
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