Many people cut up their credit cards to stop themselves from using them, but it is important to remember that this does not close the account. To do that, a cardholder must contact the credit card company and ask them to close the account. While this may not always be a good idea, it is sometimes necessary to minimize annual fees and control your spending habits.
If you decide closing your credit card account is the best course of action, it is important to do it correctly. This guide will explain how.
Be Warned: Closing a Credit Account Can Hurt Your Score
Before you close your credit card account, you need to consider the negative affect it could have on your credit score. Several elements determine your credit score, including debt utilization, which is the amount of debt you owe compared to the amount of credit available to you. If your debt utilization is 30% or less, you are in good shape, but anything more than that could negatively impact your score.
Let’s say you have $10,000 in available credit among all of your credit cards, and your balances total $3,000. If you close one of your accounts with a $2,000 limit, your debt utilization will go from 30% ($3,000 out of $10,000) to 37.5% ($3,000 out of $8,000), which endangers your credit. If you do not have to pay an annual or monthly fee, it may be a good idea to keep the card open.
When to Close an Account
If you cannot control your spending, it may be time to cancel your credit card. It could hurt your credit score, but amassing debt will hurt your credit even more. You may take a short term hit, but it is worth the long term protection of your finances.
Another reason to close a credit card account is if you have a high fee for a card you never use. Instead of wasting money for no reason, it is a better idea to contact your credit card issuer to see if they can give you a card with lower fees and a better interest rate.
Steps to Take Before You Cancel
First, you must pay off your credit card balance in full, including any fees that may have posted since your last payment. Also, read the terms and conditions of the card to see if there is a cancellation fee. If there is a fee, you will need to pay it when you close your account.
You will want to make sure you use any cash back or rewards points before you cancel. Once you close the account, you will lose any benefits you have accumulated. In addition, it will take a few days for the rewards to process, so wait until they go through before you cancel your card.
When you call to close your account, ask your issuer if you are eligible for any other cards. They may be able to transfer you to a different card, so you will not need to cancel your current credit line and potentially damage your credit score.
Canceling a Credit Card
You will need to call your credit card issuer to close your account. You will likely talk to multiple people, and all of them will try to convince you to keep your account open. You may be offered incentives and bonuses to stay, and you will have to decide whether or not these perks outweigh the reasons you want to cancel.
Once you have canceled your card, wait a few days and call your credit card issuer again to confirm the account has been closed. Ask the representative to send you cancellation verification to your address or email account. This will ensure the account is closed so no one can use it without your permission.
You may want to keep your open accounts in good standing. The longer you have these accounts open, the higher your credit score will be. But when you know how to close a credit card properly, you can save yourself unnecessary fees.