Though it may seem strange, there is an art to canceling credit cards. Gone are the days when you can pull out granny’s shears and cut that lil’ plastic rectangle in half. Read on for our explanation of how to maximize your gains and keep your credit score intact when cutting loose a credit card that has worn out its welcome.
Why are you ditching this card?
You should consider your motivations for cutting up the card before you really do it. Why? Because your credit score is sensitive to many types of changes in your financial life. Dumping a card could actually damage your score and your future opportunities. Knowing how to cancel a credit card without hurting your credit score is important, so think about why you’re leaving your card. Some reasons may include…
- Your first year of card ownership is almost over and you will soon be required to pay an annual fee.
- You have more credit cards than you’d like and want to simplify your life.
- You feel that your spending habits are less-than-perfect and don’t want the temptation of overspending on a credit card, i.e. spending more than you can afford to pay back within a month.
- You no longer qualify for or take an interest in the card’s benefits.
How can canceling the card be harmful?
Canceling a credit card can harm your credit score by lowering your credit utilization ratio. This ratio represents the amount of credit you are using in relation to the amount of credit you have available to you. It is typically recommended to keep this ratio below 20%, but it’s better to keep it below 10%. If you have a credit card with a limit of $10,000 and you use it to buy a $1,000 laptop, your credit utilization ratio will be 10%. When you cancel a credit card, you lose its line of credit, so your utilization ratio automatically increases.
Additionally, your average age of credit heavily influences your score. The longer your credit history is, the stronger your record of being a trustworthy consumer. If you cancel a card that you have had for a longer period of time than your other accounts, your average age will shrink. This will ding your credit score. Remember, however, that accounts closed in good standing will remain on your credit report for ten years, so canceling an old card won’t shorten your history until it falls off of your report in ten years.
Finally, applying for a new credit card to replace the one you’re canceling will involve a lender performing a credit inquiry, or a hard credit check. When you apply for a credit card issued by Chase, for example, Chase will want to see your credit report before deciding whether to issue you a card to determine whether you can be trusted to pay your bills on time. This action by Chase will lower your credit score. Usually by less than 10 points and temporarily, but it dings your score nonetheless.
So, if you’re planning to cancel a card simply to replace it with another, you should consider the effect that applying for the new card will have on your score. (For a full overview of credit cards and scores, check out our article.)
Here are some approaches you can take to maintain your credit score when canceling a card…
Downgrade to a no-annual-fee card:
Knowing that canceling your card can be harmful, you may be willing to have your card converted to a different one. Let’s say you have the Capital One Venture Card and its $59 annual fee will kick in in just a couple of months. You’ve decided that the card’s benefits no long outweigh its cost, so you want to get rid of it.
One strategy is to contact Capital One and request that they convert your card to, say, the Quicksilver. You’ll ditch the annual fee, along with many of the Venture Card’s benefits, but get to keep the account opening date and credit limit. So, neither your credit utilization ratio nor your age of credit will change.
Cancel after being approved for a new card:
If you are interested in churning credit cards or signing up for a new credit card in the next few months at all, then you should apply for the new card before canceling the current card. Because canceling a card can hurt your credit score, you should let your score take the hit during a time when you won’t be depending on a system that judges you by your credit score.
Apply for a new card and then, when you’ve been approved, cancel the current one. It’s a good idea here to request a credit line on the new card that will equal the credit line on the current card. This will mitigate the risk of hurting your credit utilization ratio by keeping constant the amount of credit available to you. And, because you applied for the new card before you canceled the current one, you can wait out the temporary dip in your credit score while earning your meaty sign-up bonus.
Ask for a credit limit decrease:
If you’re intent on spreading out and/or minimizing the damage to your credit score, consider lowering your credit limit. It’s only helpful in a particular situation, so read closely.
If a card’s line of credit counts for a substantial portion of your overall credit line, consider lowering its line while simultaneously increasing the limit on other cards. Think of it this way: You have the Citi Double Cash card with a line of $10,000. You have two other credit cards with lines of $3,000 and $2,000, respectively. That means your Citi card comprises 66% of your entire line of credit ($10K of a total $15K).
Losing that card would substantially hurt your utilization ratio. So, consider requesting credit line increases from your other two cards, and, when approved, lowering your line on (or just canceling) the Citi card. This prevents your credit utilization ratio from taking a substantial hit.
And in general, always…
- Minimize the hit to your credit utilization ratio: by either applying for a new card before canceling the current one, by requesting a credit line increase on another existing card, or by paying off all of your balances.
2. Refrain from closing your oldest accounts: Credit history is important, so if closing an account is going to substantially shorten your credit history (average age of credit), think twice before you close the account. If it has no annual fee, consider keeping it in a drawer and using it to automate a small, monthly bill. If it does carry a fee, request to downgrade the card to its free counterpart (which is usually possible).
3. Politely and firmly request that the card company records that your account was ‘closed by consumer’s request.’ It’s always best to make sure that your account will be correctly marked as being closed upon your request and not for some other reason (i.e. closed by the lender due to your bad behavior).
4. Use your accumulated rewards before ditching the card! In many cases, canceling a credit card means losing your hard-earned points. Use them and maximize their value (usually by redeeming them for a sponsored gift card or a plane ticket).
5. And for your information… Positive elements of your credit history will continue to influence your score and credit report for ten years. Negative elements will fall off of your record after seven years. Note, however, that some credit scoring models, including the one used by Credit Karma, only count open accounts when calculating your average age of credit.
6. Finally, this article neglects to mention interest rates: because we believe that using credit cards is an unsustainable and harmful way to borrow. Due to extreme interest rates, carrying a balance on a credit card is unwise. Do not get a credit card or consider churning cards until you know with certainty that you will pay that sucker down to $0 every month and deny banks the satisfaction of charging you interest like you’re some average, underdeveloped consumer with no ability to live within his means.
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