It probably sounds obvious to say that canceling a credit card is one way “to spurn your credit card and never look back” but it is not as simple as it sounds; if not done properly it can damage your credit.
Whether they are trying to declutter their financial life, distance themselves from high fees, or improve credit score, learning how to cancel the credit card is useful so that a person does not harm their credit profile.
Well, in this particular guide, we will lead you through different procedures involved in cancelation of credit card and at the same time retain the credit score.
Understanding the Impact of Cancelling a Credit Card
So, let’s first take a look at the general information on how cancellation may influence your credit score. The aspects that define your credit score include the credit utilization ratio, credit history and the kinds of credit you have.
- Credit Utilization Ratio: This is the portion of your total approved credit that you already utilised. Closing a credit card lowers the sum of your total credit limit, which, if other balance is carried forward, results in a high credit utilization ratio.
- Although credit utilization rate is usually reflected in the credit report as a percentage, a high value of this ratio is considered to be damaging to the score.
- Credit History Length: This component determines your length of credit history whereby entities having longer credit histories are usually considered to be in a better standing. Closing a credit card, or simply a popular one, decreases your credit history and can reduce your score.
- Credit Mix: It is good for one to have both revolving credit (credit cards) and installment credit (installment loans) among others. This mix is decreased by canceling a credit card and it impacts the score minimally in most cases.
Steps to Cancel a Credit Card Without Hurting Your Score
Follow these steps to minimize the impact on your credit score when canceling a credit card:
1. Assess Your Current Credit Situation
Before making any moves, assess your total credit card balances, credit card limits and hence your credit card utilization ratio. Go to a credit report service and check credit score to determine how accounts influence consumers’ credit record.
Action Step: You may think about using a credit monitoring service as a way of getting a picture of your credit state.
2. Pay Off the Balance
Make sure they have cleared the balance on your credit card fully before you can go on to cancel the card. Balancing on credit means that you will continue to accrue interest and possible fees that can harshly impact your credit utilization rate.
Action Step: Give the last payment and ensure that the outstanding money is zero.
3. Use the Card Sparingly
If you are in a position that you want to close a credit card that charges an annual fee active the card occasionally until you cancel it. This will assist to maintain credit utilization rate low and it will also reduce on the probability of incurring on unnecessary charges.
Action Step: Small purchases are to be made using the card and then balance to be cleared so as to keep the account active.
4. Contact the Credit Card Issuer
Contact the credit card company to ask them to close your account. That is why some issuers might offer you to lower an interest rate or to waive fees if they know that you are going to cancel.
Action Step: They can either visit the people s service section and demand cancellation or call the companies’ customer service and demand for a cancellation in writing.
5. Monitor Your Credit Report
If you are expecting to receive credits based on your card’s Reward Program or other related promotions or special offers, be sure to commonly check your credit report to verify that the card has the status “closed by consumer” and there are no other wrongs done. It is useful in early identification of any problems that may be ailing an organization.
Action Step: It is suggested that people should keep an eye on the credit report of the three big credit bureaus: Equifax, Experian, and TransUnion.
6. Consider Keeping the Card Open
At times, it is better not to close it especially when it is one of the oldest cards, or has a high credit limit. This is better for your credit history date and total credit utilization ratio as well.
Action Step: What the positive aspects of keeping the card open, and what the negative ones are to canceling the card.
Alternative Options
If canceling a credit card seems like too much of a risk to your credit score, consider these alternatives:
1. Request a Credit Limit Decrease
If your goal is to reduce spending, you might request a credit limit decrease instead of canceling the card. This can lower your potential for debt while keeping the account open.
Action Step: Contact your credit issuer to request a credit limit reduction.
2. Transfer the Balance
If you’re concerned about high interest rates or annual fees, consider transferring the balance to a card with better terms. This allows you to keep the account active and manage your credit utilization.
Action Step: Apply for a new card with a balance transfer offer and pay off the old card.
3. Negotiate Better Terms
Sometimes, simply negotiating with your credit card issuer can lead to better terms, such as lower fees or interest rates, without needing to cancel the card.
Action Step: Contact your issuer to discuss available options for better terms.
Conclusion
Canceling a credit card can be a strategic move for managing your finances, but it’s important to handle it correctly to avoid negatively impacting your credit score. By paying off your balance, monitoring your credit report, and considering alternative options, you can make an informed decision that aligns with your financial goals.
Remember, maintaining a healthy credit score involves understanding how your actions affect your credit profile and taking proactive steps to manage it effectively.