If you’re wondering about how to cancel a credit card, you’re likely not the only one. According to Experian, the average American holds four credit cards. But what if one of these is an unused credit card? You may want to cut down on the number of cards you have, but you should carefully consider whether it’s the right decision.
There may be negative repercussions that result from canceling a credit card. Among them, your credit score could take a hit and it may take some time for it to recover. However, in some cases, canceling a credit card could be a smart financial move.
Let’s go over what happens when you cancel a credit card and when canceling a credit card might make the most sense.
What happens when you cancel a credit card
When you cancel a credit card, you’re effectively severing a relationship with the credit card issuer. You will no longer have access to the line of credit the company has given you or any perks and benefits of the card. Canceling a card also involves more than simply cutting your card in half.
Typically, you’ll want to do the following to cancel your credit card:
- Pay off any remaining balance.
- Redeem any available rewards.
- Call up your credit card company and let them know you want to cancel your card.
Your account should be a clean slate so you don’t run into issues with debt collectors in the future. And because points, miles, or cash back may also be canceled when you close a rewards card, you don’t want them to go to waste.
When you make the call to cancel your card, it’s likely the credit card representatives will try to see what they can do to convince you to keep the credit card. They may ask you to explain why you want to cancel and you might be transferred to the retention department. You may even be offered some promotions or deals in exchange for keeping your card open.
If you still want to cancel your card, you can politely let the representatives know that’s the case. They’ll eventually go through the process of canceling the card. At this point, you shouldn’t have to do anything else other than destroying any copies of the canceled card.
Note: Just remember not to put any metal credit cards through a paper shredder! You can request a prepaid return envelope from your card issuer for metal cards and then they can destroy them properly.
If you have a balance on the closed account, you’ll still have to pay it off and credit card interest can still accrue. If you miss any payments, you may also have to pay late fees. If you miss payments for 180 days (six months), the credit card will be charged off. At that point, your debt is still owed, but you may now owe it to a collections agency and it may show up as a delinquency on your credit report. To avoid this scenario completely, it’s best to pay off your credit card balance before closing the account or do a balance transfer to a 0% interest rate credit card.
How closing a credit card can impact your credit score
One of the biggest concerns over closing a credit card is how it might affect your credit score. To understand why your credit score could be affected, let’s take a look at what makes up your score. Your credit score is calculated a little bit differently by each of the three credit bureaus (Experian, Equifax, and Transunion), but the basics are the same.
According to Experian, your credit score consists of percentages of these factors:
- Payment history (35%): If you pay your debt on time, you’ll have a good payment history. Late payments can negatively impact your credit score.
- Credit utilization (30%): Your credit utilization ratio is how much credit you’re using divided by your total available credit. Basically, how much of your credit you’re taking advantage of. If you utilize too much credit (generally above 30%), your credit score may go down.
- Length of credit history (15%): The age of your credit accounts will affect your score. A longer credit history makes you less of a risk in the eyes of lenders. If your average age of credit is higher, you should expect to be higher in the credit score ranges.
- New credit (10%): Recently opened credit accounts and hard credit pulls can have a negative impact if you have too many of them.
- Credit mix (10%): Credit accounts come in many forms, including credit cards, mortgages, car loans, and student loans. If you have different forms of credit accounts, you may see a positive impact on your credit.
When you cancel a credit card, you’re affecting a few of these important factors. Primarily, your credit utilization, credit history length, and credit mix will change. Because these account for 55% of your credit score, their weight is significant and it could negatively impact your credit score.
Canceling a credit card can increase your credit utilization because you’re losing a line of credit. If your total available credit goes down, but the amount of credit you’re using stays the same, your credit utilization goes up. It works like this:
- You have $5,000 in credit card debt and your total available credit line across all your credit card accounts is $20,000.
- This means you have a 25% credit utilization rate ($5,000 / $20,000).
- You then close a credit card that has a $5,000 credit limit, so your overall credit available drops to $15,000.
- You now have a 33.33% credit utilization rate ($5,000 / $15,000) which is above what the credit bureaus are looking for and can drop your credit score.
It may not always be the best idea to cancel a credit card because of how it can affect your credit score, especially if it’s your oldest account or one with a high credit limit. However, there are some scenarios in which canceling a credit card may make the most sense.
5 times it makes sense to cancel a credit card
1. You want to stop paying annual fees
Credit card perks and benefits can be a real draw, but many of them come with an annual fee attached. If you find the benefits don’t offset the cost of a high annual fee, it may be time to cancel the card. You may experience a small hit to your credit score, but you’ll also save money each year.
Before closing the account, you might try checking with the card issuer to see whether there are any options to downgrade the credit card. This effectively changes your credit card to a different product with different benefits. It may be possible for you to switch to a no annual fee credit card. Even better, the credit card issuer doesn’t actually close the account when you change to a different product. So your credit history will continue to grow and benefit your credit score.
As an example, if you find you aren’t traveling much, you could downgrade a card like the Chase Sapphire Preferred or Chase Sapphire Reserve to the Chase Freedom or Chase Freedom Unlimited. You’ll still have a great credit card, you’ll save money, and your history with Chase will continue.
2. You don’t mind a drop in your credit score
If you have a well-established credit score, you might not mind a small drop. Individuals who regularly pay off multiple credit accounts can often afford to cancel a credit card if they want or need to. They may find they don’t use a certain card very much so it’s not as useful for them. Canceling the card wouldn’t significantly hurt their credit score unless it was one of their oldest credit accounts.
If you’ve recently taken out a car loan or mortgage on a house, you may not be as worried about your credit score for a while. Taking out a loan impacts your credit score and it may take some time to recover. Canceling a credit card around the same time may not make a difference to you, as you have to wait for your score to bounce back anyway.
3. You can’t keep from spending
If you can’t keep from spending and don’t know how to manage your debt, it’s better to get rid of a credit card than hang on to it. Credit cards can provide you with a lot of value, but it shouldn’t be at the cost of drowning in debt. In the long run, it’s better to take a hit to your credit score. You can continue to improve your credit score through other means, such as paying your existing debt in a responsible manner.
4. You’re getting a divorce
It’s rare, but there are still joint credit cards out there. Joint credit card account owners have all the same rights and benefits when it comes to a credit card. Each cardholder can use the credit card for purchases up to the max limit, and they’re both responsible for paying off the balance. This means you could be responsible for that credit card debt during a divorce.
In the case of a divorce or separation, it could make sense to cancel a joint credit card. There’s no need to keep a credit account open with someone you no longer intend to share finances with. And this combo of divorce and debt could negatively affect your credit if your ex-spouse were to continue using the card without making payments.
5. You want another card from the same card issuer
Credit card companies don’t officially publish their limits on the number of cards you can have from them at one time. Still, some card issuers may have unofficial credit card application rules in place.
For example, American Express is known to limit you to five American Express credit cards and HSBC will limit you to three credit cards. U.S. Bank doesn’t appear to have a hard limit, but it may be more difficult to get approved for more U.S. Bank cards if you already have a couple.
In these instances, it may be a smart move to cancel a credit card from a certain issuer to improve your chances of getting a different card from that same financial institution.
There are situations where credit matters, such as if you’re looking to get a good rate on a car loan or you’re applying for an apartment or utilities. So you always want to think through any financial decisions you make.
In all cases, you should only use credit cards if they’re beneficial for you. You can use them as a tool to build credit or to cover essential expenses. You shouldn’t use them if you’re going to carry debt and get yourself into financial trouble. But in difficult times it may still be OK to break recommended credit card rules.
That said, there’s no set rule on when or if you should cancel a credit card, as it depends on each situation and the factors involved in your personal finances. Most of the time, holding onto credit card accounts to keep your credit score healthy would be the recommended option. But in the scenarios we outlined above, you might consider canceling your credit card instead.