For simplicity’s sake, having only one credit card for everything you need to do (and to build credit) would be ideal. But this isn’t always the case. In fact, according to a survey from Experian, Americans have, on average, 3.1 credit cards per person.
If you want to cut down on the number of credit cards you own by closing one or more of them, here’s what you need to know.
It’s generally recommended that you keep at least one of your credit card accounts open and active. This is because closing a credit card can affect your credit score.
Your credit report is made up of many factors, one of which is the length of your credit history. In a nutshell, your credit history measures how long you’ve had credit and how you’ve used it. Credit reporting agencies look at how long you’ve had each of your credit cards, and then they calculate the average to determine your credit age.
Closing a credit card, especially if it’s one you’ve had for a long time, can lower the average age of your credit, thus impacting your credit score. If you want to close a credit card but lessen the impact, consider closing one of your newer cards. That way, the average age of your credit history won’t be affected as much.
Another important factor in your credit report is your credit utilization ratio. This is the amount of money you owe compared to the amount of credit you’ve been allotted. When you close a credit card, your credit utilization ratio can also be affected. Let us explain.
Let’s say you have two credit cards. On the first card, you have a credit limit of $12,000, but there is a zero balance on the card. On the second card, you have a credit limit of $6,000 and a $4,000 balance on the card. Between the two cards, you have a balance of $4,000 and a credit limit of $18,000, making your credit utilization ratio approximately 22%. But, if you opt to close the card with a zero balance, you would have a balance of $4,000 and a credit limit of $6,000, making your credit utilization ratio 66%. Such a high ratio could negatively affect your credit score.
There are some possible risks to closing a credit card. But there are still justifiable and beneficial reasons for pursuing this route. Some reasons could include:
You have a card with a high annual fee.
You’re struggling to juggle numerous payments and want to have fewer bills to worry about.
You’re trying to reduce the amount of debt you owe. If this is the case, paying off the balance and then closing the card could help.
You and your ex-spouse have a shared card that neither of you wishes to keep.
You have a promotional credit card with an airline or retail store, and you don’t use the card anymore.
If you’ve decided to move forward with closing one or more of your credit cards, be sure you have everything ironed out with the account in question. Here are a few things you should do before closing your credit card(s).
If the credit card you want to close has some form of rewards or a points system attached to it, be sure to redeem those before closing the card. Once the account is closed, especially if the points are issued by the card company, your rewards points may be gone, too.
If the card you’d like to close still has a balance, be sure to pay it off before closing the account. You may have to pay fees if you close the card before paying off all your debt. One thing to be mindful of is residual interest, or interest that accumulates between the time the billing statement goes out and the date your payment is received. This is important, because if you forget to pay off the residual interest from the previous billing cycle before you close your card, you could incur the same fees had you not paid down your debt in the first place.
Because of the potential impact on your credit score when you close a credit card, it’s best to close your newest cards first to avoid any big change to the age of your credit history. Just be sure to double check how long you’ve had each of your cards before you decide to close them. Older credit is much better for your score than younger credit, so it’s best to keep your older accounts open.
Still want to close your credit card account? Here are the steps you should take.
Be sure you’ve paid down the amount you owe on your card and used any possible rewards associated with the card you want to close.
Depending on what your creditor allows, you can close your card by calling the number on your card or by going online.
When you contact your creditor to say that you would like to close your account, odds are you’ll be met with opposition. Your creditor will likely try to convince you to keep the account open, since it’s in their best interest to keep your business. But, if you believe this is the best decision for you financially, then stand your ground and insist on closing your card.
After you contact the credit card company, send a written letter detailing how you requested to close the account; ask for a written confirmation from the company that the account has been closed, as well. Send your letter by mail — but make sure you can track it so you know the letter was received. This is especially important if you made your request over the phone. If something goes wrong on their end and the card isn't cancelled, you’ll want written proof that you made the request.
About 30 days after closing the account, check your credit report to make sure everything was updated.
Once you’ve cancelled the card, don’t forget to dispose of it properly. Cut it up and throw it away.
Keep in mind that just cutting up a card or keeping it in a drawer without canceling it doesn’t mean it’s actually gone. As long as the account is open, it will be a part of your financial life and credit history.
So if you have one or more credit cards that you don’t want, follow the steps above to close the accounts properly.