Many a time, you may have heard that cancelling a credit card account could harm your credit score. And while it is true that closing a credit card can affect your score, that isn’t always the case. Sometimes it’s just a myth.
Generally, leaving your credit card accounts open is the better option, even if you’re not using them. Nevertheless, there are some well-founded reasons why you may want to close an account. Keep on reading to learn and comprehend what they are, plus details on how to cancel a card the right way.
Comprehending the effect of Credit Utilization Ratio
The reason why credit experts suggest against closing unused credit cards is, “Canceling a credit card has the potential to reduce your score, not increase it,” explained by Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.
This potential score drop often occurs because closing a credit card can affect your credit utilization ratio. How much of your total available credit is being used, is measured by the ratio, according to your credit reports. The more available credit you use (per your reports), the worse the effect will be on your credit score.
Here’s a simple instance of how closing a $0 balance credit card could have an adverse effect:
Credit card number one has a $1,000 limit and a $1,000 balance.
Credit card number two has a $1,000 limit and a $0 balance.
Your credit utilization on both cards combined is 50%. ($1,000 total balances + $2,000 in total limits = 50% utilization)
Close credit card number two and your credit utilization jumps to 100%. ($1,000 total balances + $1,000 total limits = 100% utilization)
Your aim should be to pay your credit card balances off in full every month. Doing the same not only protects your credit scores, but it can also save you a lot of money in interest.
Before closing a credit card account, payment of your balance in full is important. Provided all of your credit cards show $0 balances on your credit reports, you can close a card without hurting your credit score.
Valid Reasons to Cancel a Credit Card
Cancellation of a credit card is generally a bad idea. However, there are some situations in which a card cancellation could be in your best interest. Here are three.
Separation or Divorce
At the time of separation or divorce, it’s best to close joint credit card accounts. As a joint cardholder, you’ll be liable for any past or future charges made on the account. After that, you can apply for a credit card a new one.
High Annual Fees
Cancellation might be warranted if your card issuer charges you a high annual fee for an account which is not in use. Nevertheless, consider the following first.
Receiving advantages from the account that outweigh the annual fee, such as travel credits and perks, can turn out to be worthy of the cost. An annual fee on a credit card which is not in use or benefits from is another story.
Call your card issuer to ask for the annual fee, before you cancel the account. Be sure to mention that you’re considering closing your account.
Too Much Temptation
Some people find the temptation of using credit cards too much to resist. And while this might be a valid reason to close a card for some, there are other ways you can try to curb overspending without sacrificing your credit score.
Cancellation Checklist: 6 Tips
If you have finally decided to close your account, then, here are six simple and safe tips to help you navigate the process:
Redeem unused rewards on your account before you call for cancellation.
Ideally, pay off all your credit card accounts to $0 before cancelling any credit card. At the very least, minimize your balances as much as possible.
Give a call to your credit card issuer for the card’s cancellation and confirm that your balance on the account is $0.
Mail a certified letter to your card issuer to cancel the account. It asks that a letter confirming your $0 balance and closed account status be mailed to you in return.
Check your three credit reports 30 to 45 days after cancellation to make sure that the account reports that it was closed by the cardholder and that your balance is $0.
With the three credit bureaus, dispute any incorrect information on your reports.