Do you like scares when it comes to dealing with your credit? If so, just mention to others that you’re thinking about closing a credit card account, and you’ll get an earful of opinions saying you should never do this because it will only harm your credit.
But there are times when closing your credit is beneficial or even necessary, and while there’s the potential for a credit score downgrade, doing so won’t automatically result in damage.
Here’s the why, what will happen, and how for closing a credit card account.
Why close credit card accounts?
There are a few situations when you may want or need to close a credit card. Some of those include the following.
If spending on credit cards is forcing you into debt, closing your credit card may be a justifiable last resort against the risk of piling onto current balances. In this case, preventing more debt might be more important than worrying about damage to your credit score anyway.
You won’t be able to close a credit account with a balance still outstanding. Bring the balance down to zero first by paying it off or transferring to another card, and then consider closing the account to keep yourself from going back into debt again.
No longer want to pay a monthly fee
Some credit cards, especially those with higher-end rewards and benefits, charge an annual fee. These cards can be worth the added cost if you’re using benefits like airline lounge access or concierge service. If you’re not using the extras, you might want to cancel your account to avoid paying hefty fees just for holding onto the card.
Sometimes you might be able to get the annual fee waived or convert your annual fee card account to a different card with no yearly fee. If this is an option, you may be better than closing your account with the potential credit score hit.
Desire to obtain another card
Some credit card issuers limit the number of accounts you can have open or the available credit they’ll extend.
I was recently rejected by Chase for a new card since I already had a few open credit accounts with them. However, all I had to do was close one of the older cards to get approved for a new one that I preferred due to the better rewards.
While my credit score seemed to take a small hit from this decision, having the new card with more valuable rewards made more sense for me financially.
Too many cards to manage
Having many credit cards can just make managing your money harder, especially if you’re using many credit cards at once. While simply taking a few out of your wallet could solve this problem, closing an account may even further simplify the situation.
Increased identity theft threat
As long as your account is open, it’s possible that fraudulent charges can be made. Although you’re typically not liable for unauthorized charges made on a credit account, you’ll still have to spot them to have them removed.
If you’re at risk of identity theft or simply want to ease the chore of watching over all your cards, consider closing an account to make life easier.
If none of the above issues are a real concern of yours, you might not need or want to close your credit account at all. For example, if you simply don’t intend to use a certain credit card, it’s usually fine to leave the account open and file away your card. Doing this may be a better strategy than than closing that account since there will be less of a risk for lowering your credit score.
What will happen to your credit score
Closing a credit account will typically impact two areas related to how your credit score is calculated: credit utilization and length of your credit history.
When you close accounts, you may actually increase your credit utilization percentage if you keep a balance on your other credit cards cards. While keeping a balance isn’t necessarily bad for your credit, having a credit utilization rate that’s too high can negatively affect your credit score. You can calculate your credit utilization, which accounts for approximately 30% of your credit score, by dividing your total credit available on revolving accounts by the total balance you have outstanding.
If you don’t carry a balance, it’s likely that closing accounts will have a lesser or no affect on the credit utilization portion of your credit score.
Length of credit history
Closing credit accounts, especially older ones, can affect the length of history portion of credit reports.
According to myFICO, your FICO Score takes into account “how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts.” While closing the oldest account now might not have an immediate impact, you can lose points on your credit score 10 years in the future when the average age of your credit slips because this older, established account is no longer found in your credit report.
How to correctly close an account
Canceling a credit account is quite easy, actually. It’s simply a matter of contacting your credit card issuer, which is usually done by telephone, and asking to close your account. Make sure your balance is entirely paid off before attempting to close an account.
The hardest part of canceling may be speaking with a credit card sales rep that might try to talk you into keeping your account open. It’s possible she’ll tell you why it’s a bad idea for you to close your account and will make other offers for you to stay. But if you’ve already made up your mind, just explain that you’ve decided to close it.
After this, it’s recommended that you send a written letter to confirm closure of the account. Many credit providers will send you their own confirmation by mail either automatically or with just a verbal request. Either way, you’ll want a record that the account has been closed in good standing by the cardholder.