Canceling a credit card
How do I cancel my credit
Before you start cutting up the cards, keep
three things in mind:
- It's important to only cancel credit cards with
empty credit lines. If your balance is anything but zero, you'll
want to keep the account open until you pay it off.
- Don't let a card issuer know that you're thinking
of leaving until you've paid off the balance. Some issuers will
jack up your interest rate if you try to cancel while you have
a balance. "If you close an account when you maintain a balance,
they increase the interest rate to the maximum allowed as a penalty,"
says Steve Rhode, president of Myvesta.org, a financial crisis
and treatment center.
- This strategy isn't for everyone. If you plan to
take out a mortgage or car loan in the coming months, canceling
credit cards could actually worsen your chances of getting favorable
terms (more on that later).
The first step in canceling a card is to contact the card issuer.
Many issuers let you cancel an account by phone.
You may be transferred to a special service rep who will try to
convince you to keep the card. If you've been a good customer, you
might want to block out some time. They may be willing to knock
down your interest rate, waive an annual fee or upgrade your card
from standard to platinum. Some issuers of air mile credit cards
have been known to offer two-for-one plane tickets or travel vouchers
to customers looking to leave.
If the new-and-improved card deal is better than other cards in
your wallet, you may want to consider keeping it and canceling another
card instead. Otherwise, stick to your guns and cancel away.
Be sure to ask your issuer to report to the credit bureaus that
the account was "closed at customer's request."
Make note of the day and time you called and to whom you talked
for your records. A written confirmation that an account has been
closed should be on its way from the card issuer.
Hang on to this notice for your records. That way if anything goes
wrong with the account at a later date, you've got proof that you
If you have balances spread out over several cards, you may want
to consolidate balances on one or two low-rate cards and cancel
the rest. This balance-transfer
guide from Bankrate.com will show you how.
But not everyone should start canceling all kinds of credit lines.
If you're planning to buy a house or car soon, you may want to hang
on to your unused credit lines until after you've qualified for
Canceling a large amount of unused credit could actually hurt your
Credit-scoring models look at a number of factors when calculating
your score, including the result of the following formula: The total
amount of debt on credit cards and revolving accounts divided by
the total amount of debt available on those accounts.
This formula results in a fraction less than one. The lower the
fraction the better. A score of one would mean your outstanding
debt equals your available credit and you've maxed out your cards.
Let's look at an example. Let's say you've got $5,000 of debt and
$15,000 in credit lines. By dividing 5,000 by 15,000 you get one-third.
You're using one-third of the credit available to you.
Now let's say you cancel an unused credit card with a $5,000 limit.
You've still got $5,000 of debt but only $10,000 in credit lines.
By dividing 5,000 by 10,000 you get one-half. You're now using one-half
of the credit available to you.
The closer to one this fraction gets, the more it hurts your credit
The best advice for a home or auto shopper is to hang on to credit
lines until after you've landed your loan.
If your credit card balance is zero, go ahead and close as many
unused accounts as you want. As long as your credit cards are balance-free,
it won't hurt your credit score a bit. So call those card issuers
and cut away.
If you're in credit trouble or if you had credit problems in the
past and you know an open credit line is just going to tempt you
to spend -- go ahead and close the account.
Yes, it may ding your credit score a bit. But
if it will keep you from acquiring more debt, it's best to do it.
You can worry about building up your credit score after you're back
on your feet financially.