Will Canceling A Credit Card Hurt My Score?

canceling a credit card

Thinking Of Canceling A Credit Card?

We’ve all been there! You end up with a card you don’t use, or a line of credit at a store you no longer visit.

But there’s another side to every coin, and when it comes to credit, things get complicated fast.

Many people say it damages your credit score to close a line of credit. But is that true?

Well, kind of. So many factors come into play to create and alter your credit score, that canceling a credit card that you’ve had for many years (leaving you only with much younger credit lines) could bring your score down. Or if you cancel it incorrectly and leave even a tiny balance pending, which then goes to collections, this can become a major headache.

So what should you do?

canceling a credit card

If you’re thinking about cleaning up your credit report by closing a credit card account or two that you haven’t used for years, you probably want to reconsider that plan. That’s because closing a credit card account can actually lower your credit score. How? One, by potentially reducing the length of your credit history, especially if you’ve had the account for a long time, and two, by reducing your available credit. Let’s break it down further.

Does Closing a Credit Card Hurt Your Credit?

The length of your credit history makes up about 15% of your major credit scores, including your FICO credit score. It looks at how long you’ve had credit by looking at the opened dates on all of your accounts. And your available credit has a direct impact on your credit utilization rate, which is how much debt you owe versus your total available credit limit(s). Your credit utilization rate is another important component of your credit score, accounting for 30%, for instance, of your FICO credit score. So in terms of your credit score, closing credit card accounts that you don’t use is one of the biggest mistakes you can make.

Why Closing an Account Hurts ‘Credit Utilization’

The amount of revolving credit card limits that you are currently using is called your “revolving utilization.” Let’s say you have a credit card with a $10,000 limit and a $2,000 balance. You are utilizing 20% of your credit line.

To maximize your credit scores, you’ll want your revolving utilization to be as low as possible, with 10% or lower, being ideal for most people.

An open credit line with a roomy credit limit and zero balance will help to lower your revolving utilization, when you carry balances on other accounts.

So consider keeping your revolving utilization low by keeping old accounts open and balances low.
– via Credit.com

Know What To Do

One of the most important things when it comes to canceling a credit card, is going about it the right way – and taking steps in the right order.

If you’ve thought through the pros and cons above and decided it’s time to shut down one of your credit lines, then keep this process in mind to make sure you don’t do more harm than good.

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. Remember to redeem rewards. In the case of rewards cards, it is common to lose some accrued rewards when a card is closed, and this may be unavoidable. But with planning, it should be possible to minimize the loss. Check the rewards balance and redemption procedures on the issuer’s website.  You may be able to take accumulated miles or points as a statement credit, if you are unable to apply them to travel or merchandise.  Cash-back cards generally have the easiest redemption features. However, most of them require rewards to reach certain thresholds — usually $20 or $25 — before you can redeem for a statement credit. A few cash-back programs award accrued cash only once a year, on a predetermined schedule. Knowing the rules for redemption will allow you to plan how to capture built-up rewards before you cancel the card.

3. 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. If you normally carry a balance from one month to another, you will need to pay the full statement balance two months in a row to wipe out the balance and stop further interest charges from accruing.

4. 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, others may be less obliging. If you meet with resistance, hold firm, as it is your right to close the account. 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.

5. 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. 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.”

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 with return receipt requested so you can prove the company received your letter.

6. Be patient. Then sit tight. Getting the card canceled may take a month or more. 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.

7. 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, put it with the log you are keeping and note the date the receipt comes in.
– via www.creditcards.com

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