If you feel as if you have too many credit cards, you may be tempted to cancel the cards you are not actively using. While this is a good way to minimize the chance you will get into debt, it could hurt your credit score. So, what exactly happens when you cancel a credit card?
Credit Score Changes
If you cancel a credit card, your credit score will drop for two reasons. Your credit score is partially determined by how long you have had credit accounts open. If you cancel a card you have had for a long period of time, you will lose some of your credit history and the positive credit that went with it.
Your credit score is also determined by your available credit ratio. When you cancel a card, you are lowering your debt utilization. For example, if you have $5,000 in available credit on several cards and only carry a balance of $1,000, you are using 20% of your available credit. If you cancel a card with a $3,000 limit, your available credit drops to $2,000. This raises your debt-to-credit ratio to 50%, which will lower your score. Ideally, your debt utilization will be below 30%.
When you cancel a credit card, your account will obviously cease to exist. Before you cancel, make sure canceling the card will not negatively impact your future with the card issuer.
Even though canceling a credit card can drop your credit score, there are some benefits to doing so. Once a card is canceled, you are no longer in danger of having the card stolen by a criminal. Thus, your identity will be slightly more protected because you have fewer cards that can be stolen.
Another benefit is that you will no longer be tempted to use the card. If you have a tendency to spend too much, canceling a credit card may save you from accumulating major debt. Another option is to simply ask your card issuer to lower your credit limit instead of canceling the card altogether.
The Cancellation Process
Before you cancel a card, be sure to redeem any rewards you may have accumulated; these may be lost once you cancel the card.
If you do decide to cancel your card, you need to contact your credit card issuer and say you wish to close your account. While some card companies charge cancellation fees, most will just try to convince you to keep the account open. The initial representative may transfer you to a different department, where you will talk to a customer service specialist, who will likely offer you a series of promotions to keep your account open.
If you have any balance or annual fee, you will need to pay those before your card company closes your account. If you have a secured credit card, any remaining fees will be deducted from your initial deposit, and the company will mail you a check for whatever is left, or they will deposit the balance in your bank account.
Should I Cancel My Unused Cards?
Unless your card carries a large annual fee, it is probably best to keep the card open, even if you do not use it. If you are worried you will use it for an unnecessary purchase, you can always lock your credit card in a safe deposit box at your bank, so you can only access it if you really need it.
Keep credit card accounts open since unused accounts help your credit score. However, do not risk spending more than you can actually afford. If you are smart with credit card cancellations, they will not haunt you in the future.