Closing a Credit Card Account

We all like closure. The perfect ending to a TV show. That final payment on a loan, etc. But before you close down your credit card account, there are some things you should know before you say goodbye.

Advantages of Closing an Account

We all have our reasons to close an account. You got a new one, or one with better benefits, or the store closed. Here are some good reasons to close accounts.

To reinforce self-control: They’re like cupcakes-it’s hard not to indulge. No matter how hard you worked to get your balance down the temptation to use it is always there.
To eliminate fees: Some cards have annual fees. And if you’re not using the card, the fee may not be worth it.
To reduce the risks of identity theft: When you’re not using it, you don’t pay attention to it. You don’t keep an eye on the card. You don’t watch the statements. Thusly, it’s a prime target for a thief to steal and use.
To better handle divorce proceedings: When the marriage is over, it’s a good time for shared accounts to be over. So maybe close it and open individual accounts. So no one has to argue over who spent what. And everyone lives happily ever after.

Disadvantages of Closing an Account

While there are pros to canceling accounts, there are some cons. So before you do anything, consider these points that could affect your credit score.

To avoid negative credit utilization consequences: Your credit utilization ratio is the amount of credit available to you vs the amount of credit you are currently using. If you have a credit limit of $10,000 on your credit card and owe $1,000 on the card, you’re only utilizing 10% of your available credit. Ideally, creditors want your utilization to be below 30%. Having one card that’s completely paid off improves your overall ratio. In short, the more zero balance cards, within reason, you have open, the better your credit utilization ratio.
To take advantage of ‘aged’ accounts: The longer you’ve paid down an account (and be in good standing) the better these “aged” accounts are for your credit. The better your credit, the more the credit industry likes you. Preferring those with long-term success to those with shorter ones. So think about closing newer ones before the old ones.

Rules of Thumb for Closing Accounts

If you do close an account, you want to do it in a way that minimally affects your credit. So, you get the best possible experience from closing the account.

Redeem all your rewards. They disappear when you close the account.
Pay off your entire balance. Do this instead of transferring your balance to another account.
Call the card and notify the company you’re closing the account.
Confirm that they’ve closed the account over the phone, if possible.
Destroy the card. Consider using a shredder that destroys paper and credit cards. Otherwise, use scissors to destroy it, cutting through the numbers. After you’ve officially canceled the card, wait a few months, then check your credit report to make sure it’s indeed a closed account.

Bottom Line

Take the time to evaluate your options when you close down a credit card account. It may absolutely be the right thing to do, but make sure you consider all the possibilities to take advantage of the options that help you the most.