How to cancel a credit card?

August 21, 2020 / 6 minutes of reading

How to cancel a credit card? Is it a bad idea to cancel a credit card account? Have you been wondering how canceling or closing your credit card account will affect your credit report and credit score? If so, this article is designed for you.

There are times when you will want to close your credit card. For example, you could be tempted to close a card without using it. Why would you keep it open if you do not use it? What would happen once you close the card? Is your credit score going to stay the same?

In this article, I am going to walk you through the process of canceling your credit card and how it will impact your credit score.

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How canceling a credit card will impact my credit score?

Closing a credit card account can hurt your score depending on how you do it. Among the following factors that affect your credit score, two of them could be negatively impacted by the account closure.

The first factor is your credit utilization which is the total amount of credit you have used out of your total credit limit. The outstanding balance you have on the remaining credit cards could increase your credit utilization once one card is removed from the list.

Please, look at the following example for more details. We will assume that you have three credit accounts open and want to close one of them.

Credit Card 1: You have used $2000 and your total credit limit is $3000
Credit Card 2: You have used $1000 and your total credit limit is $2000
3rd credit card: You have used $0 and your total credit limit is $4000

At this time, you want to cancel the third credit card because you are not using it.

First, let’s see how much your credit utilization is before you cancel the third card.

The total credit utilization on all cards is $3,000 ($3,000+$1,000+$0) out of total credit limit of $9,000 ($3,000+$2,000+$4,000). In other words, you have used 33.33% of your total credit limit.

This percentage is high compared to how much you should be using. It is always a good idea to use less than 30% of your total credit limit. At the same time, keep the utilization on each card below this percentage. Learn more about factors that hurt or improve your credit score.

So, what would happen if you cancel card number 3 before you pay off that balance?

Let’s cancel the third credit card and see what will happen to your credit utilization.

Your new total limit will become $5,000 ($9,000-$4,000). At this time, your credit limit was reduced, however, your credit usage stayed the same ($3,000).

So, your new credit utilization is now 60%. In other words, your credit utilization increased by 16.66% after closing one credit account. This is because you are using $3,000 out of your $5,000 credit limit.

This credit usage increase will not look good on your credit report and therefore it will reduce your credit score.

The second factor is the age of your credit. It is important to know that closing your credit card will reduce your credit age. Your credit age is the average of all of your credit card ages. If one card is taken out, your credit account age will go lower. The effect on your credit score and remaining age will depend on the age of the card you canceled.

If a card has more age, it will have more impact on your score due to the longer payment history on it, according to Experian.

For this reason, it would be a good idea to close the most recent card instead of a card with more credit age.

How to close a credit card without affecting your credit score?

In order to avoid a spike in credit utilization, you must bring all your credit card balances to 0$. That is you need to pay off the balance on each credit card.

By using this method, your total credit card usage will be $0 out of $9,000, from the example above. If we cancel the last card, we will still have $0 credit utilization. The only thing that will change is our credit limit which will slide to $5,000.

Since the credit card usage remained $0 after canceling this card, your credit score will not be affected.

What should you cancel your credit card?

Although it is not a good idea to cancel your credit card, there are reasons you could consider canceling your credit card.

The following could be the reasons canceling a card will be beneficial in the long term.

Which credit card should I close?

If it comes to closing your credit card, it is important to close the right card. This will reduce the impact the cancelation will have on your credit score.

Your credit cards have different ages and each one of them affects your credit score.

The older a credit card is, the more it contributes to your credit score. This means that if you are to cancel a credit card, consider canceling one with the lowest age. This way, your average age will not be affected much.

According to Experian, a credit card with more age will have more payment history. As a result, this card will strengthen your credit score. Also, refer to the credit card cancelation reasons above to help you decide what card you should cancel.

Why should I keep my credit card account open?

Before you cancel your credit card, make sure that it is the best choice for you. Keeping your credit card account open will strengthen your credit report and credit score. Even if you are not using a credit card, it is still contributing to your credit score through the increase of your credit age.

It may not be a good idea to cancel a credit card that falls into the following categories.

How to cancel a credit card?

The following tips can help you in your credit card canceling process.

The following is some of the personal information you need to gather before calling them.

Your Full name
Mailing or residence address
Date of birth
Social Security Number(SSN)
Answers to security questions embedded in your account

How to avoid losing your points and rewards when you close your credit card?

Redeem your rewards and mile points: Make sure that you use the mile points or cash rewards before canceling the credit card.

Get a similar card with the same rewards program: According to NerdWallet, you can transfer the points earned from one card to another as long as they have the same rewards program.