There’s more to canceling a credit card than just cutting it up and throwing it away. There can be an impact on your credit report, so here are tips for deciding when it’s really worth it to cancel a credit card, the best way to cancel it, and being on top of what happens after that.
Should you close your credit card?
There could be several reasons you’re thinking about canceling a credit card:
- You don’t use it anymore.
- You’ve found one that has better rewards for you (like a credit card for college students or one that helps pay back student loans).
- You don’t pay the full balance and another card has a lower interest rate.
- There’s an annual fee that’s not outweighed by the benefits that you get from it (see “Extra tips” for another option).
- It’s too tempting to spend money with it.
These are all valid reasons for considering canceling a credit card. But there’s one overarching reason to think twice about doing that—its impact on your credit score.
The connection between credit cards and your credit score
A credit score is a summary of how you’ve handled previous loans and other financial obligations (like credit). Without a good score, you might pay higher interest rates for mortgages and car loans—it could even affect whether you land an apartment.
How a credit card can impact your credit score
Building it up: A credit card can help you increase your credit score, especially if you make your monthly payments on time. In fact, your payment history accounts for 35% of your FICO® Score.
History: This plays an important part in how creditworthy you are. If the credit card you’re thinking of closing is one of your oldest, and it has a low balance, you might want to keep it and close a newer one instead. Why? When your oldest card is off your credit report, it can look like you haven’t dealt with credit for very long. Plus, if your older card has a higher spending limit, it means your available credit is lower, which can cause your credit score to drop.
Frequency: Every time you apply for a credit card, the issuer will do a credit search—which will show up on your credit report. Too many inquiries can lower your score. That’s why opening a lot of new cards can lower your rating (although new offers can look tempting). That doesn’t mean that you should never get another card; just don’t open a bunch of them within a short time.
How to close your credit card the right way
If you’re sure you still want to cancel your credit card, here are some steps to follow:
- Make sure your account is paid in full.
- Try to use any rewards that you’ve accumulated with the card.
- Contact the issuing bank (the phone number’s on the back of the card), make sure there’s no balance, and confirm the cancellation.
- Follow up with a letter to the bank confirming you’re closing the account (keep it for your records, just in case).
- Shred/cut up your card so the account number can’t be stolen.
- If you’re thinking of closing more than one card, space them out—don’t cancel them all at one time.
- If you’re canceling due to a high annual fee or unusable rewards, see if the issuing company has a different card that meets your needs; this could get you a better deal and keep your account active. Plus, swapping to another card in the company’s lineup means you won’t have a ding on your credit report because you’re not closing an account!
- Don’t cancel your credit card if you’re applying for a loan at the same time; wait until the loan is all set.
- After you’ve closed the account, check your credit report (a good thing to do once a year even if you’re not closing credit cards).
How to reopen a closed credit card account
If you closed the account: If you were the one to cancel it, simply call the bank/institution that issues the card and tell them you’d like to reopen it; you can also go online to reapply. You’ll have to supply the same information about income, residence, etc. that you did when you first opened the account.
If the issuer closed it: Contact them directly, find out why it was closed, and see what you can do to have it re-issued. If it was due to inactivity, it should be easy to get a new card. If it was due to missed payments, you’ll have to reassure the issuer that you’re able and determined to do make timely payments now. You might consider a secured card, where you deposit money, which often serves as your credit limit.
If you do re-open a credit card account, be sure to find out if you’ll have the same account number, pay another fee, and whether you can recapture any rewards that you had before.
There are pros and cons to canceling a credit card. Financially, it might be a good move (lower interest rate, better rewards) but make sure you think it through to get the most from a new card while minimizing the impact on your credit.