How to cancel a credit card
With care, you can close an account without hurting your credit score
By Jeremy M. Simon
You want to cancel your credit card. Before you pick up your scissors, know this: Canceling a credit card the right way involves more than simply snipping it in two. It requires you to follow specific steps to close the credit card account for good with the least damage to your credit score.
Reasons to cancel a credit card
The decision to cancel a credit card may be based on the desire to avoid excessive spending or if the terms of the card (such as annual fees or a high interest rate) are no longer friendly.
It makes sense to cancel cards that are unnecessarily costing you money. While you can request a lower interest rate by contacting the card issuer, there is no guarantee the issuer will respond favorably. "You want to close accounts that have very high interest rates attached to them," says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies (AICCCA). Credit cards that charge annual fees are another good target for cancellation if the issuing bank proves unwilling to waive that fee.
The opening of a new credit card account can also be a good time to close another: After taking advantage of a great balance transfer credit card deal or a big sign-up bonus on a new rewards card, consider canceling an old card, Jones says.
Before you cancel a credit card
Prior to closing any credit card account, you need to consider the possible effect on your credit score. And just because you cancel a credit card doesn't mean that its payment information comes off your credit report right away.
In the case of open accounts, "positive credit data can stay on the credit report indefinitely," says Craig Watts, public affairs manager for FICO, the company that created the most widely used credit score, the FICO score. Closed accounts with zero balances and no associated negative information typically remain on a credit history for 10 years from the date they are reported closed. "This allows the positive information to remain longer than most negative information," says Rod Griffin, director of public education with credit bureau Experian.
That's because bad marks on your credit report have an expiration date. "Negative data such as late payments and foreclosures need to come off the credit report after seven years, by federal law," Watts says.
Adds Griffin, "If the account is never again positive, is charged off and sent to collections, the original account and any subsequent collection account will be deleted at that time."
Experian provides an online list of how it deletes information from its credit reports.
In addition, potential lenders take into account the amount of credit still in use once a card and its associated credit limit gets canceled. That's because credit bureaus and lenders are interested in what is known as a balance-to-limit ratio, also known as your utilization ratio, which compares the amount of credit being used to the amount of total credit available to the borrower.
"The ratio is more important today than how much available credit you have," Griffin says. From a lender's standpoint, "a low balance-to-limit ratio is a strong indicator of good credit risk," he says. To offset the closure of one account, for example, you can request a credit limit boost on another card in order to maintain the ratio.
Depending on your total available credit, closing a credit card account with a high credit limit could hurt your credit score, particularly if you have high balances on other cards or loans. "To close card accounts without impacting one's credit score, you need to have zero balances on your credit report for all of your active credit cards. That's because if you have zero balances, your credit utilization rate is therefore zero, and you can't raise it -- and potentially hurt your score -- by closing one or more of the active card accounts," Watts says.
To close card accounts without impacting one's credit score, you need to
have zero balances on your credit report for all of your active credit
|-- Craig Watts
Old credit is the best credit
The age of a credit card account is also an important consideration. "The time an account has been open is a factor in credit scores," Griffin says. "A longer positive history is beneficial to credit scores. So, closing an older account in theory could have a more negative impact."
How negative? There's no single answer, Griffin says. "Credit scores weigh everything in a person's credit history in relation to each other. So, for one person, closing an older account can represent higher risk than it does for another person solely because of the unique nature of their overall credit histories." If you are young and have a short credit history, closing the account could hurt your overall credit score more than if you were someone in their 50s who has a much longer credit history. As stated earlier, closing the account doesn't wipe that account history off your report, so if you open a new credit card with more attractive terms to replace the card you're canceling, your credit score shouldn't take a big hit.
Credit card cancellation, step by step
Provided you have considered these issues and have another credit card you can make charges on, you are ready to cancel your credit card. Closing an account the right way takes a little time, patience and organization. Use the following steps (and this would be a good time to print out the CreditCards.com "Cancel a credit card worksheet").
1. Know who to contact.
To begin the process of closing the account, gather and write down the customer service number and the mailing address you'll need. The customer service number is on your credit card, monthly statement and the issuer's website; the mailing address is also on the website and the monthly statement.
2. Pay down your balance in full.
Pay off your credit card in full or, if you can find a balance transfer card with better terms, transfer the balance. You can't completely close a card until the balance is paid. If you don't want any more charges accrued to the card until the balance is paid, you can contact the issuer and ask that the card be frozen until the balance is cleared and the card closed.
3. Deliver the news. Once you reach the bank's customer service representative, confirm that the balance on your credit card is zero. Do not assume that the balance is zero because you paid the total amount on your most recent bill. Interest may have continued to accumulate between the time the issuer sent the bill and your payment was made (that "leftover" amount is called residual interest).
Once you're certain the balance is zero, inform them that you are canceling the card. While some credit card companies will allow you to cancel without even speaking to a representative, other may be less obliging. "Be prepared to have the customer service rep try and talk you out of closing your account. They will be very convincing, so if this is what you decided, then tell them politely again by letting them know you want the account closed immediately," says Lou Rodriguez, founder of the National Association of Credit Responsibility and Accuracy, a consumer advocacy group. The reason for this hard-sell approach is simple: It costs banks more to find new customers than to retain existing cardholders. If you are convinced you want to cancel, remain firm. Tell the rep you want it noted that the account is being closed at your request. Ask for a name and address you can write to with a notice of your card cancellation and note this along with the call details, including date, time and a way to identify the representative you spoke to.
4. Send a letter. For added insurance (in case the customer service rep makes a mistake), write a short cancellation letter to the card issuer. Request written confirmation of the account's closure. "This is a must and is to be done in conjunction with the phone call," says Rodriguez. The letter should include your name, address, phone number and account number, and details from your earlier phone call. Also, state that you want your credit report to reflect that the account was "closed at the consumer's request." Now that credit cards get opened and closed so often, credit scores don't penalize consumers as much for closing accounts. Still, it's still a good idea to help ensure that no one thinks the card issuer closed the account, Jones says.
Being extra cautious isn't a bad thing. Enclosed with the letter, include the check number (or a copy of the canceled check or other payment verification) that you used to pay off your account balance. Make a copy of the letter for your records. Send the letter via certified mail or return receipt requested so you can prove the company received your letter.
5. Be patient. Then sit tight. Getting the card canceled may take a month or more, since a credit card issuer is a "huge bureaucracy," Jones says. After that time, take a look at a copy of your credit report to make sure the account is marked as "closed." You can pull a free copy of your credit report once a year from each of the top three credit bureaus (Equifax, Experian and TransUnion) at AnnualCreditReport.com. If the account appears open, repeat the process: Call the customer service number to report the mistake, follow up with a letter by certified mail (including a copy of your original letter requesting that the account be closed) and then check your credit report again. If that fails, you can file a dispute through one of the three credit bureaus (they are required to notify the others). And if that doesn't work, you can file a dispute with the Consumer Financial Protection Bureau.
6. Take notes. As you go through the process of canceling your credit card, you may want to keep thorough notes on who you spoke to, what they said and when. That way, if anything goes wrong, you will have all the facts recorded. When you get a return receipt from your certified mail, keep it with the log you are keeping and note the date the receipt comes in.
Although it may be worth temporarily holding off on closing a credit card if you are in the market for a new loan or mortgage, canceling a credit card shouldn't be a source of major concern for consumers with good credit, since the resulting impact on their credit scores is likely to be minimal and temporary. "Usually it's not a lasting impact," says Griffin.
See related: Cancel a credit card worksheet, Credit card video: Cutting up a credit card the right way, Protect credit scores when canceling a credit card, Will canceling a new, unused card hurt your credit score?
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