The Safe Way to Cancel a Credit Card: Protecting Your Credit Score
- Explore the impact of canceling a credit card on one's credit score and provides guidance on how to safely do so.
- Canceling a credit card can negatively affect your credit score, particularly in terms of credit utilization ratio and the length of credit history. When you cancel a card, especially an older one, it can shorten your credit history and increase your credit utilization ratio, both of which can lower your credit score.
- Take specific steps when canceling a credit card to minimize the impact on your credit score. These include redeeming any rewards, paying off or transferring the balance, and reducing credit utilization gradually.
- Monitor your credit score after cancellation to check for any errors and confirm the closure of the account.
- Manage your credit responsibly post-cancellation and consider seeking advice from a credit counselor if needed.
A common question is “what happens to my credit when I cancel a credit card?” and with good reason. While you may want to cancel a card because you no longer use it, or you’re tired of paying the monthly fee, or having it available tempts you to overspend, it’s important to think about your credit score before you act.
Canceling a credit card, especially one that you’ve had for a while, can negatively affect your credit score and make it tougher to get new credit in the future. However, this doesn’t mean you necessarily have to keep every credit card account open forever.
Use this guide to learn how to safely cancel a credit card with a focus on credit score implications.
II. Understanding Your Credit Score
Your credit score is important for many reasons. One of the main ways it is used is to determine the risk of lending to you. If a lender sees that you have a good credit score, they will have faith in your proven history of borrowing reasonable amounts and paying them back. This means you’ll be more likely to be approved for loans and probably receive lower interest rates when you are. The opposite is true if you have a bad credit score.
Your credit score is generated from the information in your credit report. Lenders report how you handle credit to various credit bureaus, and they compile reports. These reports are used to generate your credit score, which is a three-digit number that represents your credit situation. The higher the score the better.
Several factors influence your credit score. The most important is your credit history. If you make payments on time every time, this will improve your score. The longer you are able to do this, the better. This is one major reason why canceling a credit card can negatively affect your credit score. If canceling the card affects the length of your credit history, you’ll lower your credit score.
The amount of available credit also matters. Lenders don’t want to see someone who is consistently using all their available credit. They take this to mean that you are spending more than you can comfortably handle. In general, it’s typically a good idea to only use around 30% of the credit you have available. This is another reason to possibly reconsider canceling a credit card. Doing so will probably change your credit utilization.
Your credit mix matters as well. If you have a mixture of credit, such as car loans, mortgages, personal loans, credit cards, and lines of credit, you’ll likely have a higher credit score than if you only have one type of credit.
That said, credit cards play a significant role in your credit score. They are a type of revolving credit. Since you can borrow up to a maximum amount and pay it back monthly, they are a key tool for building credit.
III. What Happens to Your Credit When You Cancel a Credit Card?
Most financial actions you take have an affect on your credit score, and canceling a credit card certainly does. Before you cancel a card, it’s important to understand how doing so could impact your credit score.
1. Impact on Credit Utilization Ratio
One key aspect of your credit score is how much of your available credit you are using. This is known as your credit utilization. This is calculated by looking at how much available credit you have and comparing it to how much you are using. For instance, if you have two credit cards and each has a $5,000 limit, you have $10,000 of available credit.
In general, it is best for your credit score to use less than 30% of your available credit. Therefore, if you have $10,000 available, aim to use less than $3,000 of it.
Using the same example, if you cancel one of the two credit cards, your available credit will drop from $10,000 to $5,000. This means you’ll also need to use less otherwise you risk hurting your credit rating. If you have $5,000 in available credit and you’re using $3,000, you’re now using 60% of what you have available and this will hurt your score.
2. Length of Credit History
Having a long history of making credit payments on time will improve your credit score. If you cancel a credit card, and this card is the oldest credit account you have open, doing so will shorten the length of your credit history, and this can hurt your score.
3. Diversity of Credit Mix
Having a diverse credit mix (such as personal loans, auto loans, credit cards, and lines of credit) will help your credit score. If the credit card you are planning to cancel is the only type of revolving credit you have, canceling it can hurt your credit score.
IV. Steps to Safely Cancel a Credit Card
While “what happens to my credit when I cancel a credit card?” is a valid question, the reality is that you don’t need to keep every credit account open forever. There are steps you can follow that will make canceling a card easier and reduce the effect it will have on your credit score. Here are those steps:
1. Redeem Rewards
If you’ve collected any rewards by using your credit card and you haven’t redeemed them yet, do so before you cancel the account. Some cards may let you transfer those rewards to another account. Read the agreement that came with your card so you know what you can do to redeem or transfer any remaining rewards or points.
2. Pay Off the Balance or Transfer It
Before you cancel a credit card, you’ll need to get the balance down to zero. This means either paying it off or transferring it to another account. While some cards may let you close your card without paying the balance, you’ll probably be subject to fees or interest charges until the balance is paid. Therefore, it makes sense to do it before you close the account.
3. Consider Gradual Utilization Reduction
When you cancel a credit card, one of the biggest impacts it will have on your credit score is that your credit utilization will go up. If you use more than 30% of your available credit, this will hurt your score. Therefore, before you close a card, work on reducing the amount of credit you’re using. By gradually using less of your available credit, you’ll lessen the impact of canceling a card.
V. Expert Advice on Timing of Cancellation
Not only do you want to time the cancellation of your credit card so that your utilization doesn’t skyrocket, but you should also avoid canceling several cards around the same time. Spreading out the cancellations looks less suspicious to the credit bureaus.
Also, since closing a card may temporarily drop your score a bit, leaving time in between cancellations gives your credit time to rebuild after each one and prevents a sudden larger drop.
VI. How to Cancel Your Credit Card
Once you’re ready to cancel your credit, there’s a process you should follow. It isn’t as simple as just cutting up your card and never using it again.
1. Contacting Your Credit Card Issuer
You’ll need to contact the credit card issuer to officially cancel the card. You can usually do this by calling the phone number on the back of the card. They will likely try to discourage you from canceling, but you should stick to your plan if you want to cancel.
Confirm that the balance is zero before you cancel. You’ll also need to make sure it is noted on the account that the card is being canceled at your request. This will help ensure that it doesn’t look like you defaulted on your payments or that the lender canceled on you for some other reason.
2. Follow-Up in Writing
It might seem unnecessary or outdated, but it’s a good idea to send a cancellation letter to confirm what you requested on the phone. This will make sure that everything you discussed on the phone occurs the way you want it to.
You should also ask for written confirmation that the account was closed at your request. You can do this during your phone call and repeat the request in your letter to make sure it happens.
VII. After the Cancellation: Monitoring Your Credit Score
Your credit score may drop after you cancel a credit card. This is why it’s important to monitor your credit score post-cancellation. You of course want to know how your credit score was affected, but you will also want to keep an eye out for potential errors on your credit report so you can act to correct them.
Watch your report to confirm that the card is canceled and that the reason for the closure is “at customer’s request” or something similar. Contact the issuer if you see anything else.
VIII. Alternatives to Cancellation
While there are certainly valid reasons for canceling a credit card, it’s worth exploring the alternatives before you do so. If you’re considering canceling because the card comes with an annual fee that you no longer wish to pay, consider downgrading it to a no-fee card.
If you’re canceling because you don’t want the temptation of spending, take the card out of your wallet and delete any places where it’s saved online. This will help you use it sparingly without the need to cancel.
IX. Rebuilding and Maintaining Your Credit Post-Cancellation
If you do cancel a card, you may need to work on rebuilding or at least maintaining a good credit score post-cancellation. The most important thing you can do to help your credit score after canceling a card is to keep your overall credit utilization down. If you’ve reduced the amount of available credit you have, it may be difficult to avoid using more than 30% of it. Track your spending, try to pay off your balance in full every month, and always have a plan for how you will reduce your utilization if it starts to get too high.
Of course, paying your bills on time is always crucial. Creditors want to see that you’re able to handle whatever credit you have responsibly. This means only using as much as you can afford to pay back and never missing a payment. Even a single missed payment can cause significant harm to your credit score.
X. The Role of Credit Counseling
Your credit score is important for so many reasons. If you’re unsure of how you stand in terms of credit, if you’re feeling overwhelmed by your credit or debt situation, or if you’re concerned about what credit card cancellation will mean for your overall credit health, you may wish to speak with a credit counselor.
They can help you if you’re having trouble with debt repayment, and generally give you guidance on credit and money management. Credit counseling services typically offer free educational materials and workshops aimed at dealing with debt and improving your credit score. A counselor can also help you get a copy of your credit report and credit score and teach you what you need to know to properly monitor your accounts.
Managing your credit score is important because this score has such a large impact on your financial life. Your credit score affects your chances of getting credit in the future, and can even make it difficult to rent a home or get certain jobs. It’s crucial to work to improve and protect your credit score.
You can safely cancel a credit card without causing too much damage to your score, but you’ll want to use care when doing so. Understanding the potential impact of such a cancellation and taking steps to reduce this impact is vital.
By responsibly managing your credit cards and other debts, you can mitigate the damage done by canceling a card and set yourself up for good credit both now and in the future.
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