During this very unusual year, you may be feeling some financial pressures you didn’t see coming. To help get your finances in order, you may be thinking of cancelling a credit card account. You conclude it might be a good way to prevent overspending. Or maybe you just have too many in your wallet or purse.
Cutting a credit card into pieces may stop you from using it, but it does not cancel your account with the credit card company. In order to do that, you have to contact your issuer to properly close the account.
Here are some tips on how you should close your credit card account.
Before You Close The Account
Before you actually close your account, you need to assess the negative consequences this might have on your credit score. There are several factors that make up your credit score. One of the most important factors is your debt utilization. This is the amount of debt you have compared to your total available credit. Experts say it should be a maximum of 30%. A higher percentage could damage your credit score.
Eliminating a credit card, even if it is unused, can have a fairly dramatic impact on your debt utilization. To illustrate, let’s say you have a total of $20,000 in available credit on all of your credit cards and balances that total $6,000. If you close an account you never use with a $8,000 credit limit, your debt utilization is going to go from 30% ($6,000 out of $20,000) to 50% ($6,000 out of $12,000). That will certainly have a negative impact on your score. If that credit card does not have an annual or monthly fee, it may be much more advantageous to keep the account open. Simply use the card once every month to buy a lunch to make sure the account is “active” so the issuer won’t close it.
When to Close a Credit Account
There are two main reasons to close a credit card account. The first is when you cannot control your spending on the card. At that point, the effect on your credit score is far less important than eliminating future debt. It makes no sense to tempt yourself with incremental spending which will result in higher card balances and exorbitant interest penalties.
Secondly, if you have high fees on a card you seldom use, it may make sense to cancel. A majority of credit cards come with no annual fees, so there are plenty of less expensive options for most people.
Check These Details
Check to see that you have paid off your card balance in full, including any charges that may have appeared since your last payment. Make sure your card doesn’t have a cancellation fee. If it does, contact your issuer to see if that can be waived.
If you have a rewards card, use any points or cash back you have accumulated before you cancel it. Once you cancel the card, you likely lose all of these rewards. It sometimes takes a couple days for these rewards to process, so be sure they have cleared before closing the account.
Get in touch with your card issuer to determine if there are any other cards in their portfolio that you might be eligible for without having to cancel your current line of credit. If they can switch you to another card, you may not have to eliminate this line of credit and possibly damage your score.
How to Cancel a Credit Card Account
Once you are ready to move forward, contact your credit card company by phone to cancel the card. When you call, you will likely talk to a representative who will try to convince you to keep your account. You may be offered a bonus or incentive to maintain the account. You need to determine whether those bonuses outweigh your reason for cancelling.
When you have completed the cancellation process, wait a few days and call the credit card company once again. Verify that your account was cancelled, and request a cancellation verification be sent to you via email or letter.