When Should You Cancel Your Credit Card?

Credit cards are a great thing, when used properly. They provide fraud protection and the ability to build your credit, and many cards come with other great benefits like cash back or purchase protection. Properly applying for, using, and paying off a credit card is a critical financial responsibility. It’s also important to know when to cancel a credit card.

There are a lot of myths surrounding credit card payments and when it’s appropriate to cancel a credit card. So, when should you be calling up your bank to cancel one of your cards? The answer for some, believe it or not, should probably be never (we’ll explain why in a moment). Even if you want to cancel because of fees, there are potential solutions short of cancelling the card.

Annual Fees and Product Changing

Getting hit with an annual fee on your credit card is no fun, and is certainly reason enough to call and cancel. You should carefully weigh the benefits of your card vs. the fee they charge you each year. Some cards, like the Chase IHG which provides a free hotel night each year, have rewards that are worth more than their annual fee.

Learn More: Top No Annual Fee Credit Cards

If you’re preparing to cancel a card due to a high fee, you should first call and see if the issuer will consider waiving the fee. I recently ran into the yearly $95 fee for my Citi^® AAdvantage^® card. After calling and speaking with a representative, they offered to waive the fee if I put $95 in purchases on the card within 90 days. That’s well worth maintaining an open account to help with my credit score.

What if they won’t waive the fee? Canceling the card should still be your last resort, as you can usually switch to a no-fee card. For example, if Citi hadn’t waived the fee on my card, I would likely have changed the card to the Citi^® Double Cash MasterCard to preserve an account and help boost the average age of my accounts.

If you’ve negotiated waiving the fee or changing to another credit card and your issuer still won’t budge, it’s time to consider canceling.

The Impact of Canceling

It’s important to understand the impact of canceling a financial account like a credit card. Your credit score could be negatively impacted. Closed accounts remain on your credit report for 10 years from their last reported date. Negative information like missed payments stay on your report for 7 years. In some ways, this allows positive financial behavior to outweigh negative behavior. In the long run, however, even a closed account in good standing will fall off your report, potentially negatively impacting your credit.

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Three factors that boost your credit are potentially affected when you close a credit card: (1) the number of accounts you have, (2) your credit utilization, and (3) your average age of accounts (AAoA). Closing a card will of course reduce the number of accounts reported to bureaus. It also reduces the amount of available credit you have, causing your utilization to increase. Where you previously might have had $50,000 of available credit, you may now have $25,000 after closing a card. Finally, as mentioned above, though your accounts remain on your report for 10 years, their removal will eventually reduce your AAoA. These reasons are why it’s prudent to to consider your credit score before closing an account.

How Does This Work? A Rare Glimpse Into the FICO Credit Score Formula

I’ve Got Too Many Cards!

That’s fine. Set them on auto-pay (you should be doing this for all of your accounts anyway), throw them in a sock drawer, and use them once in a blue moon. I’ve set up a calendar reminder every 6 months to purchase $5 Amazon gift cards on my unused cards. It’s a small inconvenience that’s worth keeping my cards open.

You’re Doing It Wrong

If you’re abusing your credit cards, and thus your credit, it’s time to stop. Aside from the above scenario involving fees, this is a good justification for canceling a card. If you find yourself in a pattern of high balances and an inability to manage your credit card debt, start downsizing. Transfer balances to existing cards with lower interest rates or to a new card that offers balance transfers. Then call up your issuer and cancel your card.

It’s far more prudent to cancel cards to prevent overspending and other bad habits than it is to leave them open for the small benefits to your credit. Unfortunately, for many of us credit cards are an avenue to habitual spending and accumulation of debt. It’s certainly not worth having credit cards if they’re causing you financial harm. As an alternative, you could keep the card open but cut up the credit card so that you can’t use it.

Canceling is the Last Resort

In general, avoid closing credit cards if you can. If you’re trying to dodge a fee, either negotiate the fee or change to a no-fee version of your card. If you’re just worried about having too many cards, don’t be. Use budgeting tools like Mint or You Need A Budget to keep track of them. Also make sure they’re automatically set to pay their statement balances in full.

If, however, you find the temptation of credit cards to be too much, it might be time to eliminate them as an available financial tool. Get your house, and finances, in order before trying again.

Want to learn more? Check out How to Cancel a Credit Card Without Crushing Your FICO Score

While cancelling a credit card is not an ideal choice for most people, there is the occasional circumstance where it is warranted and necessary. Make sure that there is no other option for you before cancelling — finding an alternative may be the best way to keep your credit in tip top shape.

 

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