When to Cancel Your Credit Card
July 1, 2009, 11:42 am
Unfair changes in credit card terms may drive you to close your account. Learn whether it's a good idea to cancel a card or keep an account open for the sake of your credit score.
Many people are getting letters from their credit card companies these days that carry some unpleasant news. Creditors are raising interest rates on many of their customers, even those with no history of late or missed payments.
When you receive a communication informing you that your rate is being raised or some other terms are changing in your credit card agreement, there's a way to opt out. Buried in the fine print of the notice you are sent will be a note that says you can opt out by writing a letter and mailing it to a particular address. Yes, you have to opt out in writing, by postal mail; they don't give you an option to do it electronically. Typically, opting out of the changes your creditor makes to the agreement means canceling the account.
Is that a good idea? Generally speaking, yes, you should consider canceling your credit card when the creditor makes unwarranted changes in your credit card agreement that you find unfavorable. This is really the only recourse you have when the creditor takes these actions. You can first call your creditor to see if they'll reconsider the terms, and if not the only way for you to directly respond to this kind of situation is to cancel the card.
When shouldn't you cancel the card? One situation where it might be a good idea to keep a card open in spite of an unfair change in terms is if it's your oldest card. 15% of your credit score is derived from the length of your credit history, and keeping the oldest card open keeps that part of your score strong.
Even if canceling your second or third-oldest credit card hurts your score, the damage won't last long and it will be worth it to rid yourself of an unwanted and unnecessary source of debt.
It's true that your debt-to-income ratio is part of your credit score, so be aware that closing accounts may impact your "utilization". This is a calculation of account balances measured against your open credit limits, and your score may suffer if the balances are too high to their limits.
Another situation where you should think twice before canceling cards is shortly before applying for a new major loan. If you'll be trying to get an auto loan or a mortgage in the next 6 months, don't do anything that might have unpredictable results for your credit rating. That means don't open new accounts, and don't close existing ones. Focus on paying down the debts you have and building your credit score. Only after you've gotten the home or auto loan you're looking for should you start canceling credit cards.
If you have a large balance to repay on the card you want to cancel, you may want to apply for a new card with better terms and transfer the balance. Be sure to follow up in writing and make sure the original account is really canceled and closed "by consumer request". Your goal should be to have fewer credit cards, not more. To that end, you may be able to transfer balances from several cards onto one new one.
While the credit system is designed to make you think you should keep your credit card accounts open forever, it's a good idea to close unwanted accounts. Most consumers really don't need more than one credit card, so keeping the account with the longest history should boost your credit score and provide you with the credit you need.
For more information on improving your credit, see our "Consumer Guide to Good Credit," which is a free download from our website.
Complete our household budget worksheet. The worksheet will help us recommend a solution to reduce your credit debt.
