When you want to stop using a credit card, you just cut it up, right? Not quite. Here's how to do it right.
This week’s question is short, but if you use credit cards, important.
Hello, Stacy. Would you discuss the procedure for canceling a credit card? Thanks. — Judy
Like breaking up with a boyfriend or girlfriend, there’s a right way and a wrong way to split up with your credit card company. I’ll give you the steps, but first, consider this question:
Are you sure you want to do this?
When you cancel your account, it could negatively impact your credit scores in two ways:
- If you have balances outstanding on other cards, it could raise your credit utilization ratio, which could hurt your credit scores. For example, say you have two cards, each with a $5,000 limit. One card has a $5,000 balance, and the other, the one you’re canceling, has a zero balance. Since you have $10,000 of credit available and $5,000 outstanding, your credit utilization ratio is 50 percent. You’ve used half of your available credit. Canceling a card means you’re using all of your available credit: 100 percent. That could lower your credit scores.
- Part of your credit scores is based on the length of your credit history. Having a bunch of old accounts is better than a bunch of new ones.
Important: Neither of these things is critical. If it’s time to break up with your card company, do it. But if you’re about to apply for an important loan, like a mortgage, you might want to wait until you’re approved for that loan just to be sure.
Got your mind made up? Let’s get to it.
Step 1: Pay it off
While you can close an account to new charges, even though there’s a balance, to completely close it, you should pay it off. So if it’s time to say goodbye, it’s time to zero that balance.
Got any automatic payments hitting the card? Move them.
Once the balance is zero, don’t use the card. Wait a week or two, then check your account online and make sure no charges show up.
Step 2: Break the news — twice
Balance paid? It’s breakup time.
Call the customer service number on the back of your card or on your monthly statement. When you get a customer service rep, confirm you have a zero balance. Then tell the rep you’re canceling your account. If for some reason you don’t have a zero balance, don’t cancel.
Just as you’d do if you were leaving your lover, it’s best not to let the issuer know you’re on the way out until you’re ready to make your move.
While you’re on the phone, ask the rep for a name and address where you can send a letter to make it official. When you hang up, write a short letter to that name and address. It doesn’t have to be fancy. Just include your name, address and account number. Say you’re canceling your account and want your credit history to reflect you requested that the account be closed.
Use certified mail and request a return receipt so you can prove the company received your letter.
Step 3: Follow up
Let a full 30 days go by, then go to AnnualCreditReport.com and pull a copy of one of your credit reports. The account should show “closed by customer.” It shouldn’t say “closed by creditor.” If it does, don’t contact the credit reporting agency — it’s not their problem. Instead, get back on the phone with the credit card company’s customer service, then follow up with another certified letter to your card company explaining the problem. Include a copy of your original letter as proof of their mistake.
Wait another month, then check again.
Too much hassle? Don’t worry about it
If you’re longing for a new lover, you’re probably better off losing your old one first. But when it comes to credit accounts, you can have as many as you’d like.
It doesn’t really hurt to leave old credit lines open, as long as you don’t have too many (more than five credit cards), are not being charged an annual fee and won’t be tempted to overspend.
In short, unless there’s a reason to close an account, you could just stop using it. If you’re ever notified that your account will be closed for inactivity, and it’s one you want to keep, make a small purchase, pay it off, then place the card back in plastic purgatory.
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