Is It Bad To Cancel A Credit Card?
Ashley Kilroy7-minute read
May 07, 2021
From cash back rewards to discounts at your favorite retailer, credit cards offer a wide variety of benefits. With so many credit card offers available, it’s easy to pad your wallet with plastic. If you’re trying to limit your spending or if you’re serious about paying off credit card debt, one solution may be to close your credit card accounts.
While canceling your credit cards may seem like the obvious choice, there are some factors to consider. To help clarify how closing a credit card may impact your financial well-being, here’s a breakdown of the pros, cons and steps involved.
Pros Of Closing A Credit Card
Canceling your credit card comes with a few benefits, the biggest of which is that it can prevent you from spending excessive amounts of money. It will also prevent you from accruing additional fees and interest. If you struggle with your spending habits, closing your account can remove some of the temptation to spend.
Closing your account may also help simplify your finances. If you pay your bills with multiple credit cards, it can be challenging to keep track of the money coming in and going out. Reducing your use to one or two cards for your daily transactions can help simplify money management efforts.
Another benefit of closing a credit card account is that it may help prevent identity theft. If you are managing several accounts, it may be a while before you notice suspicious activity. Having only a few cards can help limit fraudulent charges.
Cons of Closing A Credit Card
Before you decide to close your account, it’s important to understand the impact. Canceling a card can have a negative effect on your credit score. When you close an account, you lose the credit limit available on the card. This will increase your credit use or the percentage of credit you’re using.
Your credit utilization is one of the factors credit bureaus use when determining your credit score. If you increase your credit use percentage, it may hurt your credit status. Experts recommend you have a credit utilization under 30%. The lower your percentage, the better. To calculate your utilization ratio, divide your total credit card balances by your credit limits.
There are other reasons closing an account can cause your score to drop. Canceling a card lowers the number of active accounts you have. This will have the greatest impact on your score if you’re trying to close the account with the longest credit history. The age of your credit accounts is a factor taken into consideration when determining your credit score. Due to this, it’s important to have credit cards with a long payment history. If you decide to cancel a card with a long payment history, your credit may take a hit.
When you cancel a credit card, your credit score may decrease at first. It should only take a few months to recover, but it’s still important that you pay close attention to your credit report while this is happening. You may also want to avoid applying for other credit cards, auto loans or mortgages during this time. If you foresee the need for a new line of credit, it’s best to hold off on canceling your card until you’re finished applying.
You may be wondering how much closing a credit card can hurt your credit. The answer depends on your situation. Before closing your account, make sure you weigh the advantages and disadvantages. If you’re still unsure how this decision may impact your credit, you can visit the credit score simulator at Rocket HQ. This tool will assist you in determining the impact of this decision.
When It Makes Sense To Cancel A Credit Card
While canceling your credit card may impact your credit score, there are some reasons to move forward with this decision. Here are a few examples:
- You have a high interest rate.
- You find it challenging to resist the temptation of using this card.
- You want to trade a secure card for a credit card with better benefits and rewards
- Your credit card benefits aren’t worth the high annual fee.
If any of these reasons apply to you, it may be worth it to cancel your card. Additionally, if you find the long-term benefits outweigh the short-term impact, it’s wise to move forward with canceling the card.
When It Doesn’t Makes Sense To Cancel A Credit Card
There are a few times when it may not make sense to cancel your card and you’re better off keeping it. These reasons may include:
- You want to cancel because you don’t use the card.
- This card has the oldest payment history you have on your credit profile.
- You don’t have a lot of other credit accounts. If you don’t have a lot of credit accounts, your credit profile can appear weak.
If any of these situations apply to you, you may want to find another solution.
How To Cancel A Credit Card
Your final determination may be that closing your credit card account is the best option for dealing with debt management. If so, here are some steps you can take to ensure the success of the transaction.
- Reach out to your credit card company: If you have an outstanding balance, make sure to reach out to your credit card company. They will help you make a plan for repayment. It’s best to repay your outstanding balance before canceling the card for good.
- Redeem your rewards: If you have any rewards left on your credit card, make sure to redeem them before you cancel. Some credit card companies may let you transfer your rewards to another account or use your points for transactions.
- Contact customer service: After you’ve redeemed your points and paid your balance, contact customer service. Ask them to send a cancelation confirmation in writing.
- Write a short cancelation letter: Make sure to follow up with a short cancelation letter to the credit card company. Make sure to include your name, address, account number and any other important details. Keep a copy of this letter for your records along with your cancelation confirmation. If you don’t receive confirmation within a month, make sure to follow up again.
- Update your auto payments: If you had auto payments set up through the card you’re canceling, make sure you update your payment information. You don’t want your cable service disrupted or your cell phone disconnected because you forgot to update your information.
- Alert any other cardholders: If you have other cardholders on your account, notify them that you’re canceling your account.
- Shred your old credit card: Once you’ve closed the account and paid off your balance, it’s time to shred the plastic. Cut your card into little pieces and put the pieces into different trash bags. This will make it harder for identity thieves to put the credit card back together.
Alternative To Canceling
If you think keeping your credit card around is a better solution, there are other options outside of canceling it. If you’re worried about the fees, call your provider to request a lower one. Some credit card companies may be willing to work with you to keep you as a customer. It never hurts to call and ask.
If you’re concerned about your spending habits, you may want to consider hiding your card in a safe place. Removing your card from your wallet may help reduce the temptation to use it. If this isn’t an option, you may want to consider freezing your account. This means that no one can use the card but it’s still active.
If you want to close your card because you don’t use it enough, try paying one bill with it. You could consider setting up an automatic payment like your cable bill. This will help you continue to build credit. Make sure you put a payment system in place or establish automatic credit card payments. Setting up auto payments and alerts will ensure you don’t miss a payment or incur late fees.
Many Americans struggle with debt management. In fact, American credit card consumer debt is hovering around $1.04 trillion, according to the Federal Reserve. With all the spending temptation, it’s challenging to navigate the credit card landscape.
You don’t have to cancel your credit card to get a handle on your debt. By monitoring your spending habits and tracking your expenses, you can take control of your finances.
There are many ways to manage your finances and maximize debt repayment. If you download and use smartphone apps, there are several free options available to assist, like YNAB (You Need A Budget). Apps such as this will help establish your budget and manage your debt repayment. Incorporating these helpful tools may be the key to conquering your debt.
We are a society that thrives on instant gratification. When we spot an issue, we want to fix it as quickly as we can. That’s why our first inclination is to cancel a credit card when we find we have more debt than we can manage.
It’s important to be proactive, not reactive, when it comes to debt management. If you notice that your spending has taken a turn for the worse, consider all your options. Remember that there are both pros and cons to canceling your card. Take into account habits you have control over, and techniques you can use to adjust your behavior.
Be careful when considering your choice. Note the repercussions that canceling your credit card may have on your credit score. If you decide that canceling a card is your best option, make sure to do so responsibly. Pay off your owed debt, redeem your rewards and assure that when you cancel you receive confirmation.
We should use credit cards to build, not destroy, our creditworthiness. If you find you’re relying on your credit cards to pay for your lifestyle, take a step back to re-evaluate your choices. If you need help or guidance toward improving your financial choices, use our credit simulator RocketHQ to help. We’re here to help you gain financial independence and better manage your debt.
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