Advice On Closing or Cancelling a Credit Card

It is often the case that consumers discover they simply have too many credit cards to keep track of and resolve to close a few of their accounts. It is also true that many consumers decide to transfer balances on cards with high interest rates and annual membership fees to cards offering lower rates and no charges for membership. The first impulse of such borrowers might be to simply cut up the card and toss it away.  There are several things to consider, however, before they do so.

Destroying a credit card does not mean that credit history, good or bad, is destroyed along with it.  In fact, a positive or negative credit history may remain as long as 10 years on credit reports for closed or cancelled accounts.  Of course, a negative rating should always be avoided.  On the other hand, a positive credit history on an open account is usually there indefinitely, which is very beneficial in maintaining a good credit profile.

Future lenders will look first at the utilization and available credit, or the balance to limit ratio, which has a direct effect on the individual’s credit rating.  Therefore, it is important to request an increase in credit limit before closing or cancelling a credit card to ensure that the balance to limit ratio is kept intact.  Once the account is closed, the available credit decreases automatically, and the utilization ratio goes up accordingly.  This will not be a problem if the credit card balances on active cards is zero at the time of a cancellation, however, as there will be no adverse impact on credit score or rating.

Consumers should follow certain guidelines before making the decision to close a credit card account, which include:

-          Verifying that all recent purchases are reflected on the account.

-          Cancelling all direct debits from the account and notify the merchants of a new payment method.

-          Advising the credit card issuer of any additional card holders, preferably in writing.

-          Documenting the cancellation request, whether by e-mail, letter or telephone.

-          Keeping any correspondence or documentation in case of questions or problems in the future.

-          Ensuring that the balance is zero, after figuring in any interest or fees associated with cancellation.

-          Sending a cheque or make a bank transfer, if necessary, to cover any remaining amount in the final payoff.

Consumers who are able to pay their balances in full each month should have no problem if they decide it is in their best interest to close a credit card account.  If the account is in good standing, the credit history will continue having the desired positive impact on their credit reports in the future.