Can You Cancel a Credit Card Without Hurting Your Credit Score? Here's What Financial Experts Say
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There are many reasons why someone might want to know how to cancel a credit card. These may include high annual fees, a less-than-stellar rewards program, security concerns, or the desire to streamline financial accounts. Some may want to cancel their credit card simply because carrying multiple cards in their wallet can be a hassle, or they simply don't use a certain account that often.
While any of these are valid reasons to close a credit card account, there are several things to consider first that'll help protect your finances and credit score. It's not a decision that you should make without weighing the potential long-term impacts.
Read on to learn what finance experts say about when you should (and shouldn't) cancel a credit card and the steps on exactly how to do it.
What to Know Before You Cancel a Credit Card
Before thinking about how to cancel a credit card, you should familiarize yourself with your credit utilization ratio. This number measures how much of your total available credit is being used.
Canceling an unused card, for example, can increase your overall credit utilization ratio, which will decrease your credit score. And you don't want that to happen. The more credit that's available, the worse the impact will be on your credit score.
“Ideally, you want a credit usage ratio of 30% or lower,” says Carter Seuthe, CEO of Credit Summit Consolidation. The lower you can get it, the better it is for your credit score.
It’s typically a good idea to keep credit card accounts open, even if you aren't using them anymore, says Ann Martin, Director of Operations at Credit Donkey. But there are often good reasons to cancel.
“Cards with annual fees can be too expensive to retain if you aren't using them, for example,” she says. And cardholders with poor financial habits might benefit from limiting access to credit cards. “Compulsive spenders should definitely cancel any cards they don't absolutely need.”
Seuthe agrees with this point, adding, “It’s a good idea to cancel a credit card if you tend to rack up debt and then struggle to pay it off.” In this case, it’s better to suffer a potential drop in your credit score than to make yourself appear a higher credit risk later on.
Why You Might Not Want to Cancel a Credit Card
It's important to be aware that canceling a credit card might shorten the length of your overall credit history or lessen the diversity of your overall credit mix, both of which can negatively impact your credit score.
Closing a card could also change your debt-to-credit-utilization ratio, which may impact credit scores. The implications are greater if it’s an older card with a high credit limit, or if you are new to credit and have fewer cards. You may also lose coverage that you had with the account, such as previously held travel benefits or rental car insurance.
If the card you're closing is your only credit card, consider getting a new one before you cancel, suggests Michelle Delker, CPA and founder of The William Stanley CFO Group.
“Having a credit card can help build and maintain your credit score by establishing a history of on-time payments and credit utilization,” says Delker.
Instead of canceling the card, you could also look into other options that your bank may provide. “If you're canceling solely to cut back on spending, there might be alternatives, like lowering your credit card limit,” Delker adds.
Steps to Canceling a Credit Card
If you've weighed the potential risks to your credit history, and you've checked that your credit utilization ratio is at the recommended 30% or lower, these are the steps to cancel your credit card, according to the experts.
Pay off the outstanding balance. “Most credit card companies won't allow you to close your account until you do this,” says Martin. You can either pay the card in full or transfer the balance to another credit card. “And it's key to ensure there are no outstanding charges before initiating the cancellation process,” says Delker.
Redeem unused rewards. Many cards offer cash back, travel points, or other rewards which will immediately be forfeited upon account closure. Be sure to use any benefits you’ve earned before proceeding, says Delker. And don’t forget to contact any auto-pay subscriptions tied to the account and provide them with an alternate form of payment to avoid service interruptions or late fees.
Contact your card issuer. Once your balance is paid off, contact your credit card issuer’s customer service department. Have your account information readily available, and state your request to cancel the card. “Be prepared for the representative to ask why you want to close your account, possibly offering you perks to keep it open,” says Delker.
Obtain proof of closure. Request a zero-balance confirmation letter for your records. This will help protect you from potentially incurring future charges, fees, or additional interest. Since pay-off amounts have an expiration, additional interest charges might appear on a future bill if not promptly paid off in full.
Destroy and discard the card. Once you have canceled your credit card, cut through the magnetic strip and EMV chip, then cut the card a few times along the short side, and “spread the shred” by disposing of the sections in multiple places. You can also feed plastic cards into a cross-cutting paper shredder that's designed to handle credit cards. If you prefer, request a prepaid envelope from the card issuer to send it back.
Check your credit score. Lastly, check your credit score to confirm that the cancellation has been processed correctly and is accurately reflected in your credit report. Dispute inaccuracies immediately to avoid potential lasting effects on your credit score.
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