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Canceling Your Credit Card
Whether you or your credit card company cancel your credit card your credit report will be affected. Read this article to know the pros and cons of cancelling your credit card and how credit card cancellation affects your credit score.
There will likely come a time when your credit card is canceled, either by you or the issuer. Having a credit card canceled has very real effects on your financial situation, however, including your credit score. It is important to consider the benefits versus the drawbacks of canceling a credit card before you make a decision.
When you cancel a credit card
One of the most common reasons that people cancel their own credit cards is due to a change in terms. If your credit card company decides to change the way it figures your interest rate, or if it increases the fees you pay, you might want to cancel. If you do not like the new interest rate, you can reject the change. This means that you will cancel the card and continue to pay off any outstanding balance under the old terms.
Others cancel their credit cards as part of debt reduction. If you go this route, you should pay off the credit card in its entirety and then cancel the card. When you do this, or when you cancel due to a change in terms, make sure that you call the company and then send your cancelation in writing (keeping a copy for yourself). You should also make a note on your credit report indicating that you closed the account, and stating your reason for doing so. It matters that you canceled the card, and not the card issuer.
Another way that you might cancel your credit card is when you enter a debt management program. Debt help companies that set up plans for you to get rid of debt often result in the cancellation of your credit card accounts. This is because new terms are negotiated as you make your payments.
What if the company cancels your credit card?
For the most part, credit card companies cancel a card when they feel you have become too great a risk. If you miss payments and consistently exceed your limit and rack up fees, the company may cancel your card. When this happens, you will be notified that you owe the amount in full. You can then arrange to make a payment plan. If you do not do this, the card company may turn you over to a collections agency.
Another reason that credit card companies are increasingly closing accounts is due to inactivity. Many responsible and financially savvy credit card holders have credit cards that they keep open for credit history purposes or for emergencies. These cards may not be used for months at a time. With the current economic climate, many credit card issuers are closing such accounts – they aren’t making any money for the company! If this happens, make sure you note it in your credit report: Your account was closed because you were responsible. You can keep your credit card account from being closed due to inactivity, however, by making a small purchase once a month and then paying it off.
How credit card cancellation affects your credit score
There are two main ways that closing a credit card account can affect your credit score:
1. Your available credit is lowered. One of the things taken into account with your credit score is how much credit you have available and how much of that credit you have used. If you have three credit cards with limits of $2,000, $1,500 and $2,300, you have a total credit limit of $5,800. If you have paid off your $1,500 card, and have $800 available on your other cards, you have a total credit availability of $2,300. Cancel your $1,500 card, and you suddenly only have credit availability of $800. The percentage of the credit you are using can have a substantial effect on your credit score.
2. Your established credit history can be affected. Another effect is that your length of credit history can be affected. If you close your oldest credit card, your established credit history has been shortened. How long you have had credit, and the length of time your credit accounts have been open – especially if they are in good standing – is a big deal when it comes to your credit score.
Before canceling a credit card, you want to make sure that it won’t have a big effect on your credit score. You should first pay off all of your cards, and then cancel the newer two or three cards, keeping at least one or two of the older card accounts open and active.
Related Article: Understanding Debt >>
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