Should you cancel your unused credit card?
Credit cards make shopping easier; simply swipe the card or use one-click payment when shopping online, and pouf! You have finished. But that convenience has a catch: you can get into debt quickly. The average credit card balance of U.S. consumers in 2020 was $ 5,315, according to the credit bureau Experiential.
And with the average annual rate (APR) for all credit card accounts hovering around 15 percent, according to a Federal Reserve report, interest on any outstanding balance can quickly add up. It’s no wonder that 28% of Americans said their top financial priority over the next six months was to pay off their debts, according to a Marcus Online Banking 2021 Survey by Goldman Sachs.
Whether you want to avoid overspending by reducing your access to credit cards or don’t want to pay an annual fee on a card you no longer use, you might consider canceling an old credit card. Here’s why it might not be the best idea – and what the experts suggest you do instead.
How canceling a credit card affects your credit score
There are five main factors that determine your FICO credit score:
- Payment history: Your payment history determines 35% of your credit score and indicates whether you made your past payments on time.
- Amounts due: The portion of your available revolving credit that you use is 30% of your score, amounts owed, or credit usage. Try to keep your credit utilization rate – how much you borrow divided by your total available line of credit, expressed as a percentage – below 30%.
- Length of credit history: This is the average age of your accounts. A longer credit history is a positive indicator of your creditworthiness and affects 15% of your score.
- New credit: The opening of several new credit accounts in a short period of time is a red flag for creditors. The new credit affects 10% of your score.
- Credit mix: Being able to successfully juggle multiple forms of credit is a quality lenders look for when assessing your credit. Having different types of credit, such as credit cards, installment loans, and mortgage debt, affects 10% of your score.
When deciding whether or not to cancel your credit card, it’s important to understand how closing an account can affect your credit.
A common myth is that canceling credit cards is good for your credit. But this is not the case. “If you were told you could increase your credit by closing old accounts, you were sold snake oil,” said Todd christensen, an accredited financial advisor and an education manager with Debt reduction services, a non-profit debt counseling agency. “Typically, closing old accounts will lower your credit score, especially if your balance is low,” he explains.
If you have a credit card that you don’t use but decide to keep it open, consider using it once a year for a small purchase and then paying it off right away. Otherwise, the credit card issuer may close the card due to inactivity.
When it comes to closing a credit card account, consider the age of the card. If the credit card is one of the oldest accounts on your credit report, closing it will reduce the average age of your credit history and negatively affect your score.
Your credit usage may also be affected by the reduction in the amount of credit you have available. “Closing a card will usually lower your usage rate, which means your credit score will suffer,” Christensen said. “How much depends on how much credit you already have and how much is in that account.” ”
When should you cancel an unused credit card
While canceling an unused credit card can negatively affect your credit score, there are still certain scenarios where canceling it may be a good idea.
“It makes sense if your creditor changes the terms on your credit card, which we have often seen happen,” said Gina McKague, retirement financial planner and CEO of McKague Financial, a Michigan-based financial planning firm. “Examples of these types of changes are increasing annual fees or reducing benefits,” she says.
If you have a card that you don’t use often that has changed its rewards program or has a high annual fee, you may want to cancel it.
Another common reason for canceling a credit card is to eliminate the temptation to spend too much money on that card. “If you’re really struggling to manage your credit card bills and you’re in debt, closing an account is a really important thing to do to get back on top of your own finances,” McKague said.
However, there is one major caveat: don’t cancel a card if you have a large loan, such as buying a home, scheduled for the near future. “Every time you close an account, it will lower your credit score for the next three to six months,” McKague said. So try not to cancel your credit card if you are near your closing date, otherwise the sudden change in your credit rating could derail your mortgage application.
Alternatives to canceling an unused credit card
If you decide not to cancel a card but aren’t sure what to do with an unused credit card, consider these options instead:
- Negotiate with your credit card company: If you are considering canceling the card due to a high interest rate or fees, contact the credit card company and request a rate reduction or fee waiver. Some companies will work with you to keep you as a customer.
- Downgrade to a no annual fee card: If your card has an annual fee but you are no longer reaping enough benefits to make it worth it, consider asking your credit card company to allow you to switch to another card with no annual fee and with fewer benefits. Not all issuers will offer this option for all cards, but it is worth a try.
- Cut out your card: For people who are more worried about overspending with available credit, consider simply cutting the card. This way you cannot use it or increase your balance, but your account will remain active.
- Contact a nonprofit credit counseling agency: If you’re overwhelmed with debt and don’t know where to start, contact a nonprofit credit counseling agency. Credit counseling can help you budget and get the full picture of your finances. “They can also negotiate lower interest rates with your current creditors,” Christensen said.
How to cancel a credit card
If you decide that you no longer need a card and the disadvantages of keeping it outweigh the advantages, you can cancel it. Canceling an unused credit card is a relatively straightforward process:
1. Pay your balance
If you want to cancel your card, you are probably looking for a good start. Try to pay off the balance in full before you close it, so you don’t have to worry about it after you close it. If you don’t have enough money up front to pay off the balance, consider transferring the balance to a card with a 0% APR introductory period, or taking out a debt consolidation loan, so that you can pay off your current card immediately and trim the remaining balance over a period of months or years.
2. Edit automatic payments
If you had the card linked to one of your other accounts for payments, such as your Netflix, Hulu, or utilities, be sure to update your accounts with a new payment method. Otherwise, you risk not receiving payments on time and incurring late fees or service interruptions.
3. Redeem rewards
With some cards, you will lose any credit card rewards you have accumulated after the account is closed. If you have points, redeem them before closing the card.
4. Contact your card issuer
To cancel your card, call the customer service department of your card issuer and ask for the cancellation service. The representative will likely try to keep the account open for you by offering you a lower rate or waiving fees, so make sure you are clear on what you want before you call.
Once the representative closes the account, ask them to send you a confirmation of the closure for your records.
5. Destroy the map
When you receive the email or confirmation letter that the account has been closed, cut out the card to help prevent fraud and identity theft, and then throw it out.