Having a credit card has made life easier for most people as it frees you from the need to carry cash with you every time. It allows you to go cashless and with the rise of e-commerce, paying for your purchases is now easier than ever. But, many credit cards have annual fees attached to them, and having a lot of cards can make it difficult to track all of your credit card debt.
As a credit card holder, there’s a chance that the question of whether you should close your credit card account or not has crossed your mind at some point. Cancelling your credit card is more than cutting the card itself into pieces; it requires going to your bank or card issuer and requesting that the account be closed.
Closing your credit card does have a negative impact on your credit score. Here’s how closing your credit card account will affect your credit score.
How closing your card affects your score:
- Increased credit utilization: credit utilization refers to the ratio of the outstanding balance on your card to your card limits. The lower the percentage, the better it is for you. Closing your credit card increases your credit utilization percentage.
- Reduced average age of accounts: the length of how long you have been using also has an impact on your score. Closing the card you have had for the longest time reduces the average age of your accounts.
As a result, it’s generally not considered a good idea to close a credit card account without a valid reason to do so. Here are some reasons why you might want to close a credit card account.
Valid reasons to close your credit card account
- When you’re unable to control your spending: If you have tried options like keeping the card in a place that’s hard to access or using cash only for most purchases to reduce your spending and have failed, closing your account might be the only option left.
- High annual fees: If you’re paying a high annual fee for a credit card you’re not using, then closing it is warranted especially if you don’t benefit from it. Talk to your issuer about the fees before deciding to close the account to see if they’ll give you a better deal.
- Separation or divorce: If the credit card you have is a joint one, it’s better to close it once you separate or divorce since you’ll be liable for any charges made to it whether you’re together or not.
- Your card has been used fraudulently after it was stolen or you lost it. In most cases, the issuer will automatically close it but if it keeps attracting charges, then it’s best you close it even after being issued with a new one.
How to close a credit card account
Keeping your credit card account open for as long as possible is beneficial as it helps you build up a positive credit score, more so if you’re planning to apply for a mortgage or a loan in the near future.
The first thing you should do before closing the account is evaluate how your credit score will be impacted and follow these steps:
- If your card had any accumulated rewards, redeem them as they would be lost when the card is closed. Ensure that you’re familiar with the redemption rules for your card.
- Pay off any balances on your card or transfer the balance as you will not be able to close the card if it has any balances. You can request your issuer to freeze the card until all the balance is paid to stop any charges from accruing. In the event that your balances are carried from one month to the other, then you will need to pay the full statement balance two months in a row to stop charges from accumulating.
- Call your card issuer: You will need to make this call to confirm that your card balance is zero as there could be residual interest that could have accumulated after the last payment. Once you’re assured that it’s zero, inform them of the cancellation. Should you be met with any resistance, insist on closing the account as it’s your right.
- Send a certified letter to your issuer to close the account. In the letter, request for written confirmation of the zero balance to be sent to you. The letter should have all your official details. Make a copy of the letter for your records.
- Check your credit card report to confirm the cancellation 30 to 35 days since the process can take a month or more. The account should be marked as closed and if it appears as open, repeat the steps above. If the report has any incorrect details, raise a dispute with the relevant bodies.
- Dispose of the card after confirming the cancellation process is complete. Don’t just throw it away or cut it into two, use a pair of scissors to cut each bit of information to make it difficult for anyone to steal your identity.
Benefits of closing a credit card
- You’re protected from incurring potential debt on that account.
- Help you manage the temptation of extra expenditures
- Reduces the likelihood of card fraud since any unused cards that you don’t keep track of can easily be stolen.
- You won’t have to keep paying the fees associated with it.
Want to learn more about how your credit score is calculated? Check out this quick and dirty guide to your credit score!