If you want to close credit card, you should be aware that it is more than cutting the card into two. There are certain procedures you need to take so that you don’t get your fingers burnt. Of course, you may have your own genuine reason that propels you to want to close the card. You should endeavour to evaluate the decision before you finally cancel the card. I may not know why you want to cancel your credit card. Generally, people close credit card for some reasons which may be similar to the ones discussed below.
Reasons that can make you close credit card
- Increase in interest rate: One of the reasons people may choose to close credit card is when card issuer decide to hike their interest rate beyond the level consumers can bear. Of course, the law protect consumers to some extent in this regard. But a card company can decide to increase their interest rate after the expiration of promotional offer. Possibly, when you applied for the card, you were enticed by the low introductory rate then. In some cases, low intro rate may just serve as bait. By the time the intro rate period expires, there is tendency for the interest rate on the credit card to be increased beyond what other credit card companies charge. If the gap is too wide, some may resolve to close the credit card.
- High Annual fee: As a result of the stiff competition in the card market now, credit card companies are adopting different marketing strategies to win new customers. Among the strategies is the waiver of annual fee on certain cards. People with two or three cards may choose to close credit card with high annual fee and possibly change to the one with no annual fee.
- Too many credit cards: If you have good or excellent credit score, the odd is that you will be receiving preapproved card offers in your mailbox. Some of these offers can be so enticing that one may not be able to resist them. If you continue taking the card offers, you may not know when the number of credit cards you hold grows beyond the level you can manage effectively. In this note, you may decide to close one of your credit cards.
- Inability to control spending: Credit card may be the undoing of some people who are deeply into debt today. If you realise that credit card is making you to buy on impulse, it may be appropriate to say goodbye to the card by closing it. However, this step should be the last resort after you have taken other steps and they proved not to work. Instead of cancelling credit card, you may choose not to go out with the card if you know you can be tempted to buy what you don’t actually need. Definitely, if you close your only credit card, this will affect your mix of credit which is one of the factors the credit scoring agencies usually consider in calculating your credit score. This means that you are ready for any damaging effect this might have on your credit score. Nevertheless, it may be better to experience a drop in credit score than to end up in deep debt which may be difficult for you to repay.
- Identity theft and fraud: If it is ascertained that there is an identity theft or fraud relating to your credit card, your creditor may advise that you close the card immediately. This will prevent the thief from making further charges on your account. If you suspect any identity theft or fraud on your credit card, you should endeavour to report this to your card issuer immediately. Closing of the card can follow.
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Steps to take when you want to close credit card
If you believe that you have strong reason(s) why you want to close your credit card, there are certain steps to take in order to ensure that you close the credit card in proper manner. These steps are discussed below:
- Cancel all direct charges: It is possible that you have given out your credit card details for direct charges to be made against your account. Such direct charges may be for auto renewal of your insurance, payment of monthly utilities bills or subscriptions. Before you close credit card, you need to ensure that all direct charges against the card have been moved to other card. Otherwise, you may miss some payments and this will lead to penalties. If the missed payments are reported to the credit bureau agencies, this may make your credit score to drop by few points. Missed or late payments can stay in your credit report for seven years. This may make creditors to deny you credit as they will believe that you will likely default in payments.
- Pay off the card balance: You need to pay off any balance standing in the account before you close the card. If you don’t have sufficient money to pay off the balance, you may choose to transfer the balance into another account. Transferring of balance into another account will likely attract a fee. The fee is usually in the range of 3% of the amount being transferred. Whatever option that is okay for you, you just need to ensure that the card has zero balance.
- Redeem rewards: If you have any outstanding points or rewards to redeem, you may do yourself good to redeem them before you cancel the credit card. After the cancellation of the card, you will not have opportunity to redeem your points or rewards.
- Call customer service: To close credit card, you will need to pass the information across to your card issuer. You can do this by putting a call across to the customer service agent of the card company. If you don’t know the number to call, you can look at the back of your credit card. Alternatively, if you visit the website of the credit card company, you will be able to locate their customer service number. In most cases, the agent will like to persuade you not to cancel the account. They may even offer you more favourable terms such as lower interest rate or other incentives like rewards. If you are determined to cancel the account, I believe you will not allow them to persuade you to change your mind. However, if the offer is quite okay, you may like to seize the opportunity. If you know you may not be very firm in your decision supposing what they offer you is not favourable enough, you may choose to cancel the credit card online. Some companies allow their customers to close their accounts online.
- Follow up with letter: You may want to double check in order to ensure that your card issuer acted on your previous telephone call to close the credit card. The essence of this letter is just for you to have a proof that you requested that your account should be cancelled. You can either submit the letter personally or through certified mail. In either case, you should ensure you have your acknowledgement copy or certified mail receipt as a proof of the letter. At least, you will have something to present as evidence that you requested for the cancellation of your account, in case there is any problem in the future.
- Check your credit report: After your account has been cancelled, it is good that you request for your credit report to see if the account is actually reported closed. Remember that you are the one that requested that your account should be closed. Therefore, it will be good that the closing of the account is reported so and not the other way round. Creditors may not see account reported closed by your card issuer as the same as account reported closed by you. You are entitled to one free credit report from each of the three major credit bureaus every twelve months. You can apply for this free credit report through AnnualCreditReport.com. However, I suggest that you don’t request for your credit report immediately. Your account can still be left open for few weeks in order to allow any payment that may still be pending to hit the account.
- Cut the card: After you have closed the credit card, don’t just throw the card in the waste bin. Ensure that you cut the card. This will give you peace of mind.
Effects of closing credit card
You need to understand the likely effects the cancellation of account may have on your credit score. However, the impact of this will vary from an individual to other. You may need to weigh the benefits you are going to derive if you close your credit card with the potential damage it may have on your credit score.
When you cancel an account, you automatically lose the credit that you had available on the credit card. It is possible that you have not been using the credit. At least, it contributes to the overall credits you have available. The effect of this is that, your overall credit utilization ratio will increase. Credit utilization ratio is the amount of credit you owe divided by your available credit multiplied by 100. If your credit utilization ratio is high, this may signify that you are under pressure financially and lenders may not be willing to extend you further credit. Creditors are more comfortable when they see that you have some available credits which you are not using. Your credit utilization ratio is part of what is considered under the amount you owe which account for 30% of your credit score. If you are closing the only credit card you have, this will have negative effect on your mix of credit types which is another factor that affects your credit score.
When you close a credit card, you will still retain the payment history in your credit report. But over time, say like 10 years, all the tracks of positive and negative payment history will fall off from your report. If the cancelled credit card is the oldest long standing credit card you have with good payment history, this will impact your credit score negatively in the future especially if other existing credit cards do not have good payment history. This will also affect your length of payment history which account for 10 per cent of your credit score.
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Mistakes to avoid when closing account
Based on the explanations given above regarding the cancellation of account, I will like to conclude by giving you tips of what not to do when closing credit card.
- Don’t close the oldest credit card: Except you have other accounts which you have opened for quite a long period, it is not proper to close the oldest credit card especially when you have good payment history on the account. Also, creditors like to see that you have maintained your account for quite a long period. This gives them more confidence that you will be able to manage your credit if you are extended new credit.
- Don’t close the card with highest credit limit: You should not forget that when you close a credit card, your available credit limit will reduce. So, it will be better you consider closing credit card with low credit limit so that the impact will not be too much on your credit utilization ratio.
- Don’t close the card with lowest interest rate: If you carry balance on your card, it makes sense that you only close the card that makes you pay high interest. But if you don’t carry balance, this may not be an important factor to consider as you only pay interest on the balance you carry to the next month. Nonetheless, there are other costs you may need to consider such as annual fee.
- Don’t close the card with best reward packages: If you have reward card which can help you enjoy some discounts or gain some points that you can use for purchase, you will not like to lose such card. However, reward credit cards usually come with certain terms and conditions. If you know that the terms are not favourable to you, there won’t be any need to hold on to such card. If you have any rewards you are yet to redeem, don’t forget to redeem them before you close the credit card.
- Don’t close many cards at the same time: If you decide to close more than one card, you should try to spread it over a period of time.