How to cancel a credit card safely

[UNITED STATES] Cancelling a credit card is an action that many people consider at some point in their financial journey. Whether it’s to reduce debt, avoid annual fees, or simply simplify their finances, the process must be approached carefully to avoid negative impacts on your credit score or financial standing. In this article, we’ll guide you through the safe and effective steps for cancelling a credit card, backed by expert advice from trusted sources.

Why You Might Want to Cancel a Credit Card

Before diving into the "how-to," it’s essential to understand why you might want to cancel a credit card in the first place. Here are some common reasons:

High Annual Fees: Some credit cards charge high annual fees, which might not provide enough benefits in return.

Excessive Debt: If you’re managing multiple cards and feeling overwhelmed by debt, cancelling one or more might help streamline your finances.

Better Options: If you find another card with better perks, interest rates, or rewards programs, it might be time to switch.

Avoiding Temptation: If you’re prone to overspending, cancelling a credit card can limit your purchasing power.

Closing Unused Accounts: If you no longer use a particular card, keeping it open might not make sense.

However, cancelling a credit card is not always as simple as calling your bank and requesting it. There are financial consequences and strategies you need to consider before making the final decision.

The Risks of Cancelling a Credit Card

Before you decide to cancel a credit card, it's important to be aware of the potential downsides. “Canceling a credit card can lower your credit score if it affects your credit utilization ratio or your credit history length.” Here are the primary risks associated with cancelling a credit card:

Reduced Credit Score: Your credit score depends heavily on factors like credit utilization, which is the amount of credit you’re using versus the total available credit. If you cancel a card, you may increase your utilization rate, which can lower your score.

Shortened Credit History: The length of your credit history makes up about 15% of your credit score. By cancelling a long-standing credit card, you may reduce the average age of your accounts, which can negatively affect your score.

Impact on Rewards and Benefits: Many credit cards offer rewards, cash-back incentives, or travel perks. Canceling a card means forfeiting these benefits, so it’s important to assess whether the rewards you’re giving up are worth it.

Potential Fees and Penalties: If you’re carrying a balance on the credit card, cancelling it might trigger fees, interest, or penalties, especially if you don’t pay off the balance in full before closing the account.

How to Safely Cancel a Credit Card

While cancelling a credit card can have negative consequences, you can mitigate these effects by following the right steps. Here’s how to go about it the safe way:

1. Pay Off Your Balance

Before you do anything, ensure that your credit card balance is paid off. “You should pay off your credit card balance before you cancel the card to avoid additional interest or penalties”. If you still owe money on the card, you’ll need to settle the debt to avoid potential charges after cancellation.

If you can’t pay off the full balance immediately, consider transferring the debt to another card with a lower interest rate. Many cards offer 0% APR for balance transfers during an introductory period.

2. Redeem Rewards

If your credit card offers rewards such as cash back, points, or miles, make sure to redeem them before cancelling the card. Once the card is closed, you may forfeit any remaining rewards, so take advantage of what you’ve earned before going through with the cancellation.

3. Contact Your Credit Card Issuer

To officially cancel a credit card, you’ll need to contact your credit card issuer. You can do this by calling the customer service number on the back of your card or reaching out via their website. Some issuers also allow you to cancel through their mobile app or online banking platform.

When you call, request to close the account and confirm that there’s no balance left. It’s essential to get confirmation in writing that your account is officially closed.

Keeping a record of the conversation and asking for confirmation in writing. “Be sure to get a written confirmation of the cancellation to avoid any future confusion or issues."

4. Cut Up Your Card

Once your account is closed, make sure to cut up the physical card to prevent anyone from using it fraudulently. This is a simple but important step in ensuring your account is truly closed and secure.

5. Check for Any Recurring Payments

Before cancelling your credit card, double-check that you’ve updated any recurring payments associated with it. For example, subscriptions to streaming services, online purchases, or automatic bill payments could be tied to your card. If you cancel the card without updating this information, these payments could be missed, and services could be interrupted.

You can usually log into your payment accounts or apps and update your payment method to a new card or bank account.

6. Monitor Your Credit Report

After cancelling your credit card, it’s important to monitor your credit report to ensure that the cancellation has been processed correctly. You can check your credit report for free once a year at AnnualCreditReport.com, and you may want to keep an eye on it for a few months following the closure to ensure everything is in order.

7. Consider Keeping the Card Open

In some cases, it might be better to keep the card open. If the card has no annual fee, for example, it can help you maintain a low credit utilization rate and preserve the length of your credit history, which positively impacts your credit score. Closing a credit card isn’t always necessary if it doesn’t come with major drawbacks.

“If the card is a good one, consider leaving it open even if you don’t use it often.” This strategy can help maintain a healthy credit profile without requiring you to manage another active account.

What If You Can’t Close the Account?

In some situations, closing a credit card may not be immediately possible. For example, if your card is involved in an ongoing dispute or has a large balance, your credit card issuer might refuse to cancel the account until these matters are resolved. In such cases, it’s important to work closely with your issuer and understand the reasons for the delay.

If the issuer insists on leaving the account open, try to work out a plan that aligns with your financial goals. You can also look into transferring the balance or negotiating terms if you’re having trouble paying it off.

Alternatives to Cancelling a Credit Card

If you're concerned about the impact of closing a card on your credit score, consider these alternatives:

Ask for a Lower Credit Limit: If you’re worried about the temptation to overspend, you can request a lower credit limit instead of cancelling the card. This way, you keep the account open without the potential for overspending.

Keep the Card Active by Using It Occasionally: If you don’t want to close the card but want to avoid high annual fees, you can keep the card open by using it sparingly. For example, use it for small, routine purchases and pay it off in full each month.

Negotiate with Your Issuer: If your main issue is the annual fee, try contacting your issuer and see if they can waive the fee or offer a different card with better terms.

Final Thoughts

Cancelling a credit card is a big decision that should be approached thoughtfully. The process can affect your credit score and finances, so it's important to follow the proper steps to avoid unintended consequences. Always pay off your balance, redeem rewards, and confirm cancellation in writing. If done carefully, closing a credit card can be a strategic move to help you simplify your finances.

Remember, “canceling a credit card is a personal decision, and it’s essential to consider the consequences before making the move”. With careful planning and attention to detail, you can safely manage the process and protect your financial future.