If you think the first step in managing your credit is to simply close one or more credit cards, think again.
Contrary to the advice Alec Baldwin and Ben Affleck give young salespeople, you certainly shouldn’t always close! (Millennials: Baldwin refers to Glengarry Glen Ross; Gen X: Affleck refers to Boiler Room)
Let’s take a look at the relationship between:
- Include a credit card and your credit score
- When should you close a credit card or not
- Once you’ve decided how to do it (and yes, it requires more than just cutting the card up with scissors).
How closing a credit card will affect your creditworthiness
To understand the impact of closing a credit card on your credit score, it is important to understand the various components that make up a credit score.
- 35% payment history. How reliable you are. Late payments affect your creditworthiness.
- 30% amounts owed. How much you owe and how much credit you have available or what your credit utilization is.
- 15% length of the story. How long have you had credit? Older accounts are better because they show that you are reliable.
- 10% like many types of loans. If you have different lines of credit open, the better your score will be.
- 10% account inquiries. How often have you or a lender checked your credit background.
The main effects on your credit standing when closing a card are payment history and credit utilization. If you no longer use a credit card and you no longer make timely payments on that credit card, this good behavior on your credit report comes to a standstill.
When you close a credit card, your total available balance and credit usage decreases across all credit lines. Lenders prefer lower credit utilization values. That makes sense. If you are using your credit to the full, there is an additional risk in making another loan. However, if someone is only using 10 to 30% of their total credit, they have a lot of leeway and can take on new loan payments, resulting in a higher score.
To a lesser extent, if you close a credit card, the process may be affected. For example, if you close a card that has been open for many years but keep cards that you’ve only had for about a year, your credit rating may go down.
If you were hoping you could shut down a credit card to “clean up” bad behavior – maybe you maxed out your credit card or skipped a few payments – you are out of luck. Any negative payment history stays in a report for seven years. Closing a credit card does not remove it from your credit report or the associated payment history from your credit report.
When should you close a credit card?
Keep things simple
Sometimes Marie Kondo should go with your personal finances and simplify things. If you have credit cards that you aren’t using in an old wallet in your sock drawer, these accounts should be closed.
Good candidates would be credit cards for retail stores with small credit limits and zero balances that you are not currently using or that will not need to be used in the foreseeable future. You may have opened these accounts to take advantage of a discount, such as a 20% off a 60-inch smart TV, but you’ve been using cash ever since. Close them.
Avoid high fees
If you no longer use airport lounges – and let’s be honest, who is it today? – It’s time to ditch credit cards with a high annual fee of $ 400 to $ 500 per year for perks you no longer use.
Aside from the fact that you no longer need the travel benefits, the points may also not make sense as you may shop less.
However, instead of closing these accounts, you can call the issuer and downgrade to a card with fewer perks and a lower annual fee (or possibly no fee at all).
Not sure whether you have a flair for negotiations? No worries. Ramit has covered you.
Control your expenses
Are your spending out of control?
If you think the only way to control your spending habits is simply to get rid of credit cards, close your accounts. Your creditworthiness may take a hit, but more importantly, controlling spending, reducing debt, and reintroducing good habits so you can move on to Ramit’s 7 big wins.
When you shouldn’t close a credit card
Timing is everything. While paying with a credit card in a store or on Amazon takes less than 30 seconds, it can take up to 60 days for a credit card account to be completely closed.
Don’t close a credit card if you’re going to apply for a new loan, refinance a mortgage, buy a new car, or conduct a transaction that requires the creditor to pull a credit score in the next few months.
Closing a credit card can result in a drop in your score, even if it is temporary. So if you need the highest credit score possible, hold off closing the accounts until you have new lines of credit that you need.
How to close a credit card
If you decide to close a particular credit card, follow the steps below to make sure everything works smoothly and you don’t run into any surprises later.
Step 1: Pay out your balance in full
This should be the first step when closing a credit card with the loan issuer. Get the balance on $ 0.
With some issuers, you can close an account that still has funds. You simply cannot charge new fees while you are withdrawing your balance. Just pay it out, however, so you don’t have to worry about credits or fees later.
However, you can do a balance transfer for any debts that are still on the card. Some people do this and think, “Oooh, I’m going to transfer the balance to another credit card with a lower APR!” However, you should cash out the card again in full before closing it.
Step 2: Redeem any rewards or points
If it is a rewards card, make sure you redeem cashback or points / rewards before closing your credit card account. You guessed it: use it or lose it.
Check your account some time before you decide to close it – about a month should be fine – to make sure you aren’t missing out on any perks you might have forgotten or any pills that might get into the pipeline. Make sure you don’t get automatic payments for e.g. Spotify or your gym membership.
Step 3: Cancel a credit card by calling customer service
Call the credit card company and request that your account be closed. While they are convenient, please do not use these chatbots in the lower right corner of the browser window. Also, don’t find the credit card companies on Twitter and tweet that you want to close your account.
When you call, keep in mind that the customer service representative will most likely try to persuade you to stay with the issuer. They can entertain you with special perks or reduced interest rates to keep your business going. If you really want to cancel your card, be polite but firm. (Remember, Ramit is all about negotiating right.)
At this point, you will usually be directed to someone in the bank who will double and triple confirm that you want to close the account. Go through the entire process and make a note of the names of the representatives you spoke to and the date and time of the interview. Get the postal address too.
Step 4: get it in writing
This seems like something your grandmother could do, but get it in writing. Ask for written confirmation that your account has been closed with a balance of 0 USD.
It is imperative that you receive written confirmation that you have closed your account to protect yourself from disputes or even errors in your credit reports.
If the issuer does not offer written confirmation, create one yourself. After the call, you will receive a short letter requesting that the credit card be closed. Indicate the customer’s request to close the account and include your name, address, phone number, account number and the details of your customer service call (the names of the representatives you spoke to and the date and time of the conversation). Send the letter by registered post as an extra layer of protection so you can prove it was delivered.
Step 5: wait and check
Phew, ok, time to relax a bit. Wait a month (or two) for everything to be processed. Then you want to check two things.
First, check your credit report (there are three credit reporting agencies that keep track of your credit history) and make sure the accounts are listed as “customer closed”. Credit reports are usually accurate, but mistakes happen that can affect you for years. Make sure nothing was reported wrong when you closed your account.
Second, log into your online bank account or call the issuer to make sure the credit card still has zero balance. Strange fees can pop up when the account is closed, resulting in interest and other fees if ignored.
Oh, and if you haven’t already, you can finally grab the scissors and cut up the plastic card.
Do you have a metal card? Here are 4 ways to dispose of it properly.
The last word
Know and weigh your options. Ultimately, it’s your call.
There is no hard and fast rule as to how many credit cards you should have or whether you even need a credit card. Remember, if you follow your own rules of money, you will build financial health.
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