Once a credit card has outlived its usefulness, it might be a good idea to replace it with a friendlier card. You may be tempted to simply snip the old card in two and move on with your life, but this is definitely the wrong way to get rid of any credit card.
Cutting up a card doesn’t effectively cancel it. As far as your credit report goes, you still own the credit card and therefore have access to its credit limit. This credit limit figures into the “Amounts Owed” category that contributes 30 percent to your FICO score computation.
Will Cancelling a Card Raise Your Credit Score?
The first question most people have when deciding if cancelling a credit card is right for them is, “Does cancelling a credit card help my credit?”
If you get new cards without cancelling the old ones, your total available credit limit rises. This can make you look less creditworthy when you don’t have a long credit history and the account buildup is rapid. Your credit score will likely see a drop from this.
On the other hand, even by properly cancelling a credit card, replacing it with a card that you don’t really need isn’t necessarily a good idea, because it will reduce your average account age. This may also hurt your FICO score. As the saying goes, “Old credit is the best credit.”
In any event, closing a credit card account will not raise your FICO score. So if that’s the goal, you should investigate other strategies for raising your score.
Why You Should Pay Off Cards Before Cancelling
You might be considering canceling your credit card as a way to curb your spending. While finding ways to spend less is generally a good idea, cancelling your card could backfire if you don’t pay down the balances of your remaining cards. That’s because having a card with a high balance as a percentage of your available credit limit — a number known as your credit utilization ratio — can lower your FICO score.
You can counteract this by applying for higher credit limits on your remaining cards — just don’t use that limit to go on a shopping spree. Better still, pay off your credit cards before cancelling any of them, because then your loss of credit limit won’t impact your score.
8 Steps to Properly Close Your Credit Card Account
If you’ve decided that cancelling your card is the best way to go, here is a step-by-step guide for doing so the right way:
1. Prioritize Accounts
If you want to close multiple accounts, do so one at a time, and start with the ones with the most expensive fees and interest rates.
2. Redeem Rewards
You could lose your accrued rewards when you close your credit card. Card issuers will tell you how to redeem your awarded points or miles, which you should do before cancelling. Some cards will give you a statement credit for your unused rewards, but if there are any hoops to jump through, find out about them before requesting cancellation.
3. Pay Off the Card
You need to have a zero balance on your card to cancel the account. If you can’t afford to pay it off all at once, consider transferring the balance to another card — especially one that charges zero interest on transferred balances. Such transfers usually require a one-time fee, though terms vary.
If you try to cancel a card that has an outstanding balance, the card issuer might slap you down with punishing fees and high interest rates — be sure to review your issuer’s cancellation policy.
4. Confirm Your Balance is Zero
Don’t jump to the conclusion that you’ve paid your credit card off, because there might be some residual interest in the account left over from your last balance. Call the card issuer to confirm your balance is completely repaid.
5. Be Firm in Your Request
Some credit card issuers let you cancel cards on their websites. That’s easy enough. Others insist on talking to you on the phone and giving you the hard sell to keep the account open. That’s trickier.
Don’t fall for their Jedi mind tricks, and make sure you ask that the account be marked as having been closed at your request.
6. Written Follow-Up
Send a letter to the credit card issuer confirming you requested closing the account. Make sure your final statement from the issuer indicates that you’ve closed the account and owe nothing.
7. Cut Up the Card
Cut it into small enough pieces so that your account number can’t be reconstructed by dumpster divers.
8. Check Your Credit Reports
Your credit report should show the account closed. You can obtain three (one from each bureau) free copies of your reports at annualcreditreport.com, and take the opportunity to check for and correct any mistakes on your credit reports.
Cancelling Isn’t a Restart: Your Credit History Remembers
Keep in mind that even if you zero-out and close a credit card, your usage of the card remains on your credit history for 10 years.
That’s actually a good deal, because any negative marks (such as collections) you earned while using the card linger on your credit history for only seven years. This means that good outlives bad — by three years in this case.
Following these steps will making cancelling a credit card much simpler, with fewer unwanted complications. Just remember to manage your credit cards wisely and you’ll stand a much better chance of getting a good FICO score.