Want to cancel your credit card bill? There may be cases where this is justified, but we recommend that you think twice before abandoning your account. Closing a credit card can affect your credit rating. So if you’re thinking of canceling your card, you’ll need to make a plan. Here are some strategies you can use to avoid potential credit damage when you cancel a card:
The biggest problem with closing credit cards: credit utilization
Canceling credit cards can lower your credit score, not because the accounts are closed, but because closing credit card accounts can increase your credit utilization ratio. (Spoiler alert: High credit utilization can cause problems for your credit score.)
What is Credit Utilization?
Your credit utilization report describes the relationship between your credit card balance and your credit card limit. The higher the total limit you use, the more it will affect your credit score.
You can calculate your credit utilization rate using the following formula:
- Credit Card Balance ÷ Credit Limit × 100 = Credit Utilization Ratio
Instead of checking your accounts in real time, credit score models calculate your usage by checking your credit card balances and analyzing the numbers on your credit report. Card issuers only report their activity to the credit bureaus once a month. Therefore, the balances and limits on your credit report are a snapshot of your account information as of the statement cutoff date.
To maximize your credit score, it’s best to keep your credit utilization ratio between 0% and 10%. However, if you don’t plan to apply for funding anytime soon, an occupancy rate of less than 30% may be sufficient. Either way, it’s a good idea to pay off your balance in full before your monthly payment is due to avoid costly credit card interest and protect your credit report and wallet from late fees.
To keep your credit utilization as low as possible on your credit report, the best time to pay off your credit cards is before your statement is due.
Compare credit utilization per card to total credit utilization
How Closing a Credit Card Can Affect Credit Utilization Rates
We discussed the concept that closing credit cards can increase overall credit utilization. But here’s an example of why that might happen. The table below shows an example of what happens to your credit utilization rate if you close credit card #3 (above) with a $0 balance.
In the above scenario, closing the credit card you paid off would increase your total credit utilization from 50% to 83%. In both scenarios, your debt will remain the same ($12,500), but your utilization will increase because the credit limit on the closed card will no longer act as a cushion to help you out.
It’s important to note that high credit utilization can be a problem regardless of who closes the credit card account. Card issuers sometimes close credit cards due to inactivity or other reasons. Whether your credit card company closes your account or you do it voluntarily, increased credit utilization can lead to a lower credit score.
Another Potential Problem
In addition to potential problems with credit utilization, closing credit cards can be especially difficult for consumers who do not have other accounts open. For such people, closing a credit card will dramatically shorten the length of their credit history. This will obviously have a negative impact on your credit score
How To Close Credit Cards Safely
There are several legitimate reasons to close a credit card account. For example, if you’re not sure if you’re using your credit card responsibly, you can cancel it. Another reason you might want to close a card is if your credit card has a high annual fee and the benefits don’t cover the cost. Usually, joint accounts must be closed during a divorce.
On the other hand, closing a credit card does not remove it from your credit report. So if you’re trying to block abuse by closing your account, this strategy won’t work.
If you do your research and feel that canceling your credit card is in your best interest, you can take steps to protect yourself. The steps below explain the safest way to close a credit card from a credit report perspective.
- Step 1: Pay off your credit card balance in full and confirm with your issuer that your balance is $0.
- Step 2: Cancel any recurring charges set up on your card.
- Step 3: Pay off all other credit cards before your account is closed. (If you can’t pay off your credit card debt, consider a consolidation loan to lower your utilization rate and get out of debt faster.)
- Step 4: Call your card issuer to close your account. Request written confirmation that your account balance is 0 EUR.
- Step 5: Check your three credit reports to see if your card issuer has updated the account to show that the account has been closed and has no outstanding balance.
The steps above can help you avoid damaging your credit score when you close your credit card account. However, there are other factors to consider before turning down a credit card. For example, you can redeem or transfer rewards you’ve earned with your credit card so you don’t lose them. In some cases, you may want to consider downgrading your credit card account (for example, to an account with no annual fee) instead of closing it right away.
Bottom Line
In general, you shouldn’t close a credit card unless you have a good reason to do so. Canceling a credit card will not improve your credit score or remove negative accounts from your credit report. If you find yourself in a situation where you think you need to close a credit card, have a strategy for when and how to cancel your account. For example, if you have a loan application scheduled in the near future, you may want to delay the rejection.
If you’re closing your account, it’s a good idea to make sure you’ve paid all your credit card bills first. By following these smart credit steps, you can avoid or minimize the potential damage to your credit score from closing a credit card.
