Getting Rid of a Credit Card

It’s easy to get rid of a credit card. Just cancel it. But is that the best way? And what if there’s a balance? We’ll answer frequently asked questions about canceling credit cards today on MoneyWise. So you might be tempted to think that you just have to call the credit card company and tell them you want to cancel, but there’s a bit more to it than that, especially if you want to minimize the impact on your credit score. We’ll get into that in a bit, but first, we want to mention that it’s always a good idea to cancel a card you don’t need because it reduces the potential for fraud if the card or number is lost or stolen. WHEN SHOULD YOU CANCEL A CARD? Well, first, when you realize that the card has an annual fee that’s more than the benefits you’ve been receiving, if any. That means if you’re paying a $135 annual fee but you’re only getting $100 a year in rewards, obviously you’ll be money ahead by canceling the card. You should probably also cancel a card when you’re running up and maintaining a balance. If you can’t resist the temptation, it’s probably best to cancel it. And as I’ve told you before, any rewards you might be getting are meaningless if you carry a balance. The interest wipes out any cash back or rewards points for using the card. Now, I mentioned that canceling a card will usually impact your credit score, and folks are always asking why that is. First, you have to understand the five factors that make up your credit score. Your payment history is a big one, whether you’ve paid on time or late, and it makes up 35% of your score. That’s followed by credit utilization: how much you have in outstanding balances versus your total available credit. That accounts for another 30%. Then there’s the length of credit: how long you’ve had each account open. That’s another 15%. New credit counts for another 10%, and finally, your credit mix makes up another 10%. That’s whether you have just a credit card or if you also have a car loan and maybe a mortgage. Lenders feel that having different kinds of credit makes you a better risk. Keeping those in mind, you begin to see how canceling a card will probably lower your credit score because closing that account can affect three of the five factors making up your score, your credit utilization, length of credit, and credit mix. Unless the card is completely maxed out, it will mean you have less credit available. It will also reduce the total length of time you’ve had your accounts open, and it may eliminate one type of credit in your overall mix. All told, canceling a card has the potential to negatively affect 55% of your credit score. So if you want to cancel several cards, it’s best to spread that out, canceling maybe just one every six months to lessen the impact. The effect is only temporary but you don’t want to magnify it by canceling several cards all at once. HOW TO CANCEL CARDS Now, how do you actually cancel a card? Here are the steps. First, redeem any rewards pending on the card. If you just cancel the card, you might lose them. Then you want to pay off any outstanding balance. Technically, you can cancel with a balance, but you’ll still be accruing interest, so paying it off is the real priority. Next, check your card statements for the last few months to see if you have any automatic charges. For example, maybe you have auto-pay set up for your car insurance, various apps or streaming services, and take this opportunity to cancel any you’re no longer using. If you find any you do want to keep, put them on another account. If you miss any, it could result in late fees. Now, you’re finally ready to call the credit card company to cancel. They have different procedures for doing this, so ask for specific instructions. For example, you may have to do it in writing. On the other hand, you may be able to cancel the card entirely online, so check the issuer’s website to see if there’s an online procedure for canceling. If so, follow the directions carefully to make sure it goes through. Then hang on to any confirmation you receive that the account is closed. Now, there’s still one more step to make sure the card has actually been canceled. After about 30 days, check your credit reports from each of the three reporting bureaus: Experian, Transunion and Equifax. You can get them for free at AnnualCreditReport.com. If you find that a report still indicates the account is open, you can dispute it online. On today’s program, Rob also answers listener questions: ● What are your options for Medicare supplements? ● When do annuity investments make sense? ● Does it make sense to work with a third party promising to settle your IRS debt? ● Are there any tax ramifications from filing a quit claim deed? ● What are the best conservative alternatives to a savings account? Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to [email protected]. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app. To support this ministry financially, visit: https://www.oneplace.com/donate/1085/29