Cancel Accounts

Why Cancel Accounts At All?

Cardholders choose to close their accounts for a number of reasons, including:

• No interest in maintaining account, such as for a store card they will no longer use.
• To reduce the temptation of having more credit to use.
• To make credit card bills and expenses easier to track with fewer accounts.
• To tighten their personal security against credit card fraud.
• To lower their available credit in the hopes of positively impacting their credit rating and credit report.

While these are all viable reasons, they may not apply to every cardholder, and choosing which accounts to close takes careful consideration.

Which Accounts to Close

Credit card offers vary in a number of respects: different spending limits, interest rates, penalties, grace periods, reward offers, and other terms and conditions. When choosing which cards to cancel, cardholders should consider all of these variations and keep cards that best suit their spending habits and lifestyle. For example, a credit card with a longer grace period may be more suitable for someone with a longer pay period (getting paid once per month instead of weekly), or a card offering frequent flyer miles may be more valuable to someone who travels regularly than someone who only takes one vacation per year.

At the same time, it is important to keep cards with long histories. Your credit rating depends on showing that you are a reliable consumer over a long period of time, and cancelling credit cards that you have used for years to keep one you just opened a few months ago will negatively impact that rating. When choosing which accounts to close, consider your personal circumstances, why you want to cancel accounts, and which cards can best help you meet your financial goals.

Cancellations and Your Credit Report

Many cardholders assume that cancelling credit cards will boost their credit score, but it can actually have the opposite effect. Credit scores do not rely solely on the number of accounts; more importantly, they examine a consumer’s credit-to-debt ratio.

For example, one individual who has 10 credit cards, each with a $2,000 spending limit, has $10,000 worth of available credit. If three of those cards have a balance of $1,000 and the other two cards have no balance, the credit-to-debt ratio is 3,000-to-10,000, or roughly one-third of their available credit. If they were to cancel the two empty accounts, their ratio would become 3,000-to-6,000, or one-half of their available credit. This makes it appear that they are spending more and may be a potential financial risk.

At the same time, having too many available accounts can also look bad. Even if a consumer has no balances, having a large number of cards gives them a lot of available credit, and if they were to go on a spending spree, they may not be able to manage the resulting debt. Ideally, consumers should aim to have 3-5 open lines of revolving credit, keeping low balances and a good credit-to-debt ratio (generally less than one-third).

How to Cancel Accounts

In order to close a credit card account properly, it is necessary to follow precise steps to prevent complications and miscommunications.

1. Pay off the entire remaining balance. If you attempt to close a card before paying the balance, the issuing bank may increase the interest rate to the maximum as a penalty and you are still responsible for any charges or fees.
2. Contact the customer service center. Contact numbers are printed on the card itself, your most recent statement, or the company’s website. Some cards can even be cancelled without speaking to a live operator, but this is not usually recommended.
3. Request that the account be closed or canceled. At this point, you may be asked for an explanation for the company’s records, but do not feel obligated to expound on the details. “I’m no longer interested” or “I don’t need it” is sufficient. You may also be transferred to a special department with tempting offers to keep you as a customer, but stand fast to your objective unless the offer is substantial.
4. Ask that the notation be added to your credit report that the account was closed at your request. If the company lists it as “closed by creditor” instead, that could reflect poorly on your credit score – as if they were forced to close it rather than you wanted it canceled.
5. Ask for verification. This may be a transaction or reference number that you can file in case there are problems, or you may need to write a brief letter to the company reiterating your request and asking for written confirmation that the account is closed.
6. Check your credit report after two or three months. Verify that the account was successfully closed and that the proper notation was made. If there are problems, follow up with the company to resolve the issue.

Beware of Temptation

Many credit cards will make outstanding offers to tempt customers to keep accounts open. Incentives may include lower or waived fees, reduced interest rates, bonus rewards, upgrades to a platinum account, or even zero interest on balance transfers. While these may be appealing, unless the offer is significant and outweighs other accounts that you initially planned on keeping, do not be swayed by the temptations.

In Conclusion

There are many reasons to cancel accounts, whether for debt management necessity or personal preference. Knowing how to do so properly and understanding how closing accounts affects your credit report can help consumers improve their credit history and better manage their personal finances.