Credit cards sure make it easy to buy things; just swipe the card or use one-click checkout when shopping online, and poof! You’re done. But that convenience comes with a catch: you can quickly end up in debt. The average credit card balance of U.S. consumers in 2020 was $5,315, according to credit bureau Experian.
And with the average annual percentage rate (APR) for all credit card accounts hovering around 15 percent, according to a report by the Federal Reserve, interest on any unpaid balances can quickly add up. It’s no wonder that 28% of Americans said their biggest financial priority over the next six months is paying off debt, according to a 2021 survey by online bank Marcus by Goldman Sachs.
Whether you want to avoid overspending by reducing your access to credit cards, or don’t want to pay an annual fee on a card you no longer use, you might be considering canceling an old credit card. Here’s why that might not be the best idea — and what experts suggest you do instead.
How Canceling a Credit Card Affects Your Credit Score
There are five main factors that determine your FICO credit score:
- Payment History: Your payment history determines 35% of your credit score and reflects whether you’ve made your past payments on time.
- Amounts Owed: Making up 30% of your score, the amounts owed, or credit utilization, is how much of your available revolving credit you use. Try to keep your credit utilization ratio — how much you borrow divided by your total available credit line, expressed as a percentage — under 30%.
- Length of Credit History: This is the average age of your accounts. A longer credit history is a positive indicator of your creditworthiness, and it affects 15% of your score.
- New Credit: Opening multiple new credit accounts within a short time is a red flag to creditors. New credit affects 10% of your score.
- Credit Mix: Being able to successfully juggle multiple forms of credit is a quality lenders look for when evaluating your credit. Having different types of credit — such as credit cards, installment loans, and mortgage debt — impacts 10% of your score.
When deciding whether or not to cancel your credit card, it’s important to understand how closing an account can affect your credit.
A common myth is that canceling credit cards is good for your credit. But that’s not the case. “If you’ve been told that you can build your credit by closing old accounts, you’ve been sold some snake oil,” said Todd Christensen, an accredited financial counselor and education manager with Debt Reduction Services, a non-profit debt counseling agency. “Generally, closing old accounts will lower your credit score, especially if you have a low balance,” he explains.
If you have a credit card you don’t use but decide to keep it open, consider using it once per year for a small purchase and then paying it off immediately. Otherwise, the credit card issuer may close the card due to inactivity.
When it comes to closing a credit card account, consider the age of the card. If the credit card is one of the oldest accounts on your credit report, closing it will shorten the average age of your credit history and negatively affect your score.
Your credit utilization may also be affected by reducing the amount of credit you have available. “Closing a card will generally lower your utilization rate, which means your credit score will suffer,” said Christensen. “By how much depends on how much credit you already have and the balance that is on that account.”
When You Should Cancel an Unused Credit Card
While canceling an unused credit card can negatively affect your credit score, there are still some scenarios when canceling it can be a good idea.
“It makes sense if your creditor changes the terms of your credit card, which we’ve seen happen a lot,” said Gina McKague, retirement financial planner and CEO of McKague Financial, a financial planning firm based in Michigan. “Examples of those types of changes are raising the annual fee or reducing the benefits,” she says.
If you have a card you don’t often use that has changed its rewards program or carries a high annual fee, canceling it can make sense.
Another common reason for canceling a credit card is to eliminate the temptation to overspend on that card. “If you’re really struggling to manage your credit card bills and you’re in debt, closing an account is a really important thing to do to get back on top of your own finances,” said McKague.
However, there is one major caveat: Don’t cancel a card if you have a major loan — like buying a house — planned for the near future. “Any time you close an account, it’s going to reduce your credit score for the next three to six months,” said McKague. So try not to cancel your credit card if you’re close to your closing date, or else the sudden change in your credit score could derail your mortgage application.
Alternatives to Canceling an Unused Credit Card
If you decide against canceling a card but aren’t sure what to do with an unused credit card, consider these options instead:
- Negotiate with your credit card company: If you were thinking of canceling the card because of a high interest rate or fees, contact the credit card company and ask for a rate reduction or fee waiver. Some companies will work with you to keep you as a customer.
- Downgrade to a no-annual-fee card: If your card carries an annual fee but you’re no longer getting enough benefit from it to make it worthwhile, consider asking your credit card company to let you downgrade to a different card with no annual fee and fewer benefits. Not all issuers will offer this option for all cards, but it’s worth a try.
- Cut up your card: For individuals that are more worried about overspending with available credit, think about just cutting up the card. That way, you can’t use it or grow a balance, but your account will stay active.
- Contact a non-profit credit counseling agency: If you’re overwhelmed by your debt and aren’t sure where to start, reach out to a non-profit credit counseling agency. Credit counselors can help you create a budget and get a full picture of your finances. “They can also negotiate lower interest rates with your current creditors,” said Christensen.
How to Cancel a Credit Card
If you decide that you don’t need a card anymore and the drawbacks of keeping the card outweigh the benefits, you can cancel it. Canceling an unused credit card is a relatively simple process:
1. Pay Off Your Balance
If you want to cancel your card, you’re likely looking for a clean start. Try to pay off the balance in full before closing it, so you don’t have to worry about it after it’s closed. If you don’t have enough cash upfront to pay off the balance, consider transferring the balance to a card with a 0% APR introductory period or taking out a debt consolidation loan, so you can pay off your current card immediately and chip away at the remaining balance over a period of months or years.
2. Change Automatic Payments
If you had the card linked to any of your other accounts for payments, such as your Netflix, Hulu, or utilities, make sure you update your accounts with a new payment method. Otherwise, you risk payments not going through on time and incurring late fees or disruptions in service.
3. Redeem Rewards
With some cards, you’ll lose any credit card rewards you accrued once you close the account. If you have points, redeem them before closing the card.
4. Contact Your Card Issuer
To cancel your card, call your card issuer’s customer service department and ask for the cancellation department. The representative will likely try to get you to keep the account open by offering you a lower rate or by waiving fees, so make sure you’re clear about what you want before calling.
Once the representative closes the account, ask them to send you a confirmation of the closure for your records.
5. Destroy the Card
When you receive the confirmation email or letter that states the account has been closed, cut up the card to help prevent fraud and identity theft, then throw it away.