Friend or Foe: Is It Smart to Cancel a Credit Card?

Like most Americans, you probably have a few different credit cards in your wallet, and you probably have a favorite one—one that helps you earn points for vacations, gas, groceries and more. You probably also have one that you no longer use. Maybe it doesn't earn you the right rewards, or its interest rate is through the roof. Regardless, you've likely considered canceling it.

There's a lot of information out there, and we want to help you figure out what's best for you and your financial goals. So, before you make a final decision about closing an account, here are a few things to consider:

Why do you want to cancel your credit card?

First, consider how you're currently using your credit card and why you want to cancel it. Is it because of the benefits—or lack thereof? Do you want to spend less and eliminate temptation?

Figuring out why you no longer want a card will help you determine if closing your account is truly the best course of action. Here are some pros and cons of both options:

Pros of canceling a card:

• To avoid exorbitant annual fees or a high interest rate

   

• To get spending under control

   

• To simplify expenses and spend more deliberately

   

• To replace it with a card that better suits your financial goals

   

• To reduce your risk of identity theft

   

Cons of canceling a card:

• It can shorten overall credit history

   

• It can increase credit utilization, the overall amount owed compared to the total amount available

   

• It can decrease the diversity of credit options

   

• It eliminates the added lifeline in case of an emergency

   

• It removes access to benefits, points and rewards

   

Closing an unused credit card will likely affect your credit score.

Your credit score is based on several different factors—the amount of money you owe, how many new credit cards you have, the length of credit history, payment history and the mix of credit you use, such as credit cards, student loans and car loans.

Canceling a credit card impacts each of these factors, to a certain extent. For example, closing an account reduces the available credit, making the amount owed seem higher. It will also decrease the length of credit history and the mix of credit. Finally, it will effectively end an opportunity to improve your payment history.

Not all of these factors are weighed equally, though. Payment history and amounts owed make up the biggest portion of a credit score. So, if you typically make your minimum payments on time and don't carry a large balance, closing a card will only affect your score minimally. If you're struggling to make payments and are close to your credit limit, canceling a card will likely affect the score more.

Furthermore, canceling your oldest credit card could make your credit history seem much shorter than it actually is. Before deciding to cancel, take a good look at your current score, what you owe and how it could potentially impact your overall score.

Canceling a credit card is a process.

It usually takes more than a pair of scissors to cancel a credit card. Here's a rundown on how to do it properly.

First, pay off or transfer any remaining balance. As nice as it sounds, canceling a card does not eliminate the debt. Next, redeem any points or rewards you've earned. Even if it's a minor amount, you earned them!

Then find the customer service phone number for the card issuer—it’s typically on the back of your card. Ask them directly what you need to do to cancel the card. A representative will likely offer you a promotional offer to try and maintain your business—it's up to you whether to accept, but keep in mind these deals are often temporary. If you do choose to cancel, make sure you notify authorized users and also update any automatic payments on that card.

Finally, confirm that your credit card was successfully canceled by checking your account online. It may also be beneficial to pull your credit report after 30 days to see that the account is closed. You’re entitled to one free report per year from each of the three main credit reporting bureaus at annualcreditreport.com. Once you’ve confirmed via your credit report, cut up or shred the card.

Some companies will automatically cancel a credit card if it goes unused for a certain amount of time. This will affect your credit score similarly to closing the account yourself.

Is it better to cancel unused credit cards?

If you're still on the fence about canceling a credit card, consider keeping the card open and pursuing one of these alternatives:

• If your interest rate is too high and you're trying to pay down debt, look into transferring the balance to a card with lower rates.

   

• If the annual fees are too high, call your customer service agent and ask if it's possible to downgrade to a sibling card with fewer fees and better rewards—like the Visa® Cash Back card at Mountain America.

   

• Finally, if the card is paid off, consider using it to pay a small, recurring bill or monthly expense such as a tank of gas or grocery store run. Pay the balance regularly so you don’t forget about it and miss the due date. This is a simple way to boost your credit score without overspending.

   

Ultimately, it's your decision whether to close a credit card, keep it without using it or incorporate it into your regular spending and budget plan. If you're still unsure, schedule a free appointment with a financial advisor today.