It’s common for personal finance experts to recommend against canceling a credit card. But that doesn't mean you should never do it. Sometimes the costs, hassles and risks of keeping a card open outweigh the potential drawbacks of closing it. Here's how to decide.
Why you'd want to keep want to keep a card open
Closing a card can temporarily hurt your credit scores. For one thing, it can increase your credit utilization ratio. Let’s say you have two credit cards, one with a $5,000 limit on which you owe $1,500 and another with a $1,000 limit on which you owe nothing. In this scenario, you’re using 25% of your available credit.
But if you cancel the card with the $1,000 limit, your credit-in-use will shoot up to 30%. You’ve now hit a utilization ratio that credit bureaus view unfavorably, and your credit could take a hit. The ding might be substantial; 30% of your credit score comes from your debt load, and credit utilization fits into this category.
Another consideration is the length of time you’ve had the card open. Closing a credit card you’ve had for years could impact your score down the line.
Contrary to popular belief, a credit account with positive information won’t drop off your credit report immediately; this takes about 10 years. But the credit bureaus like to see a long history of responsible credit use. By canceling an old card, you could be setting yourself up for a ding when the account no longer appears on your history.
Finally, closing an unused card means losing access to the available credit. Credit cards shouldn't be viewed as an emergency fund, but having credit available in a pinch gives you more options.
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There are sometimes good reasons to weed out a card
Given the credit score implications noted above, you might think that it’s never a good idea to cancel a card. While it’s never going to help your score to get rid of plastic, the hit will be minor if you cancel carefully (more on that in a minute). Plus, it will bounce back in time if you keep up with good credit habits.
Canceling a card you’re unhappy with will limit your exposure to fraud and simplify your finances. It’s a good idea to consider canceling if any of the following apply to you:
You’re not using the card and it charges an annual fee: Paying an annual fee is only worthwhile if you’re racking up enough rewards to outweigh it.
🤓Nerdy Tip
Check with your issuer to see if you’re able to downgrade to a different version of the card that doesn’t charge an annual fee. This is a better option than canceling altogether.You haven’t had the card open for a long time: If you dislike a card and you haven’t had it open for very long, closing it won’t affect your credit much.
You don’t have a high credit limit on the card: Again, if you don’t like one of your cards and the credit limit isn’t high, it’s probably safe to get rid of it. Doing so probably won’t impact your percentage of credit-in-use very much. Just be sure that canceling the card won’t push you above the 30% utilization threshold.
You can’t control your spending with the card: Credit card debt is costly, so if you’re constantly charging too much, it might be best to remove the temptation.
Cancel with care
If you’ve thought carefully about canceling a card and have decided to do it, follow these steps to make the process as painless as possible:
- Find out what will happen to your rewards. Canceling a card could mean giving up any unused points, miles, or cash back. If this is the case, use up your rewards before ditching the card.
- Pay off the balance. It’s tough to cancel an account that you still owe money on; settling the charges first will make things move faster.
- Contact your card’s customer service center. Let them know that you need to cancel the card and follow the steps they suggest. This might entail using an online tool or putting your request in writing, so be sure to pay careful attention and follow up if necessary.
- Monitor your credit. Check your credit report in a few months to be sure that your account has been closed.
- Wait to cancel other cards. If you want to get rid of other cards, hold off for a few months. This will give your credit score time to recover.
The bottom line: Although your credit score could take a minor hit from canceling a card, sometimes doing so makes sense. Just be sure to think carefully before canceling and follow our tips to make the process smooth.
