Did you know that according to a survey conducted, around 18% of American adults have closed a credit card account at some point in their lives. In today's fast-paced world, credit cards have become integral to our financial lives. They offer convenience and flexibility in making purchases, but there might come a time when you need to close a credit card account. Whether it's to reduce your credit exposure, avoid annual fees, or simplify your financial situation, properly closing a credit card is crucial.
Before diving further into the topic, it is recommended to first read about when you should close a credit card by Bright Money!
In this article, we'll delve into how to close a credit card and the step-by-step process of closing a credit card, taking into account the impact on your credit score, and provide some essential statistics related to credit card usage.
Understanding the Impact on Your Credit Score
Before starting to cancel a credit card, it is critical to comprehend how doing so may impact your credit score. Your credit usage ratio, which compares how much credit you're using to how much you have available overall, is one of the key elements in calculating your credit score. The total credit card debt in the United States stands at a staggering $1.07 trillion. When you cancel a credit card, less credit is available on that account, which might result in an increase in your credit usage ratio.
What is Credit Utilization Ratio and Its Impact?
According to a report, young adults between the ages of 18 and 24 tend to have the lowest credit card ownership, with only 32% of this age group holding a credit card. The ownership percentage increases with age, peaking at 69% among adults aged 55 and older.
The credit utilization ratio plays a critical role in your credit score calculation. It is recommended to keep your credit usage below 30% so as to maintain a healthy credit score. If closing a credit card account causes your credit utilization to exceed this threshold, it may negatively impact your credit score. Therefore, it's important to carefully consider the consequences before proceeding with the closure.
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Step-by-Step Guide to Closing a Credit Card
On average, each American household carries approximately $8,398 in credit card debt. Closing a credit card is a straightforward process, but it requires attention to detail. Here's a step-by-step guide to help you navigate through the closure process:
1. Review Which Card to Close
If possible, avoid closing your oldest credit card account. Your credit history's length also affects your credit score, and closing your oldest account could shorten your credit history, thus potentially lowering your credit score. Instead, focus on managing the account responsibly and keeping it open to strengthen your credit profile.
Keeping your oldest credit card account open demonstrates a long-standing credit history, which can be beneficial for your credit score. Responsible use of this credit card can help bolster your creditworthiness and financial credibility over time.
2. Review Your Credit Card Statement
Before initiating the closure, it's essential to review your most recent credit card statement thoroughly. Take note of any pending transactions, outstanding balances, or recurring payments linked to the card. Ensure that you've paid off any remaining balance in full to bring your account to a zero balance before proceeding with the closure.
Reviewing your credit card statement also allows you to identify any overlooked charges or billing errors that need to be addressed. Clearing any outstanding balances and resolving discrepancies beforehand will make the closure process smoother.
3. Redeem Reward Points or Cash back
If your credit card is associated with any rewards program, now is the time to make the most of it. Before closing the account, make sure to redeem any accumulated reward points, cashback, or other perks offered by the credit card issuer. Some credit card issuers may forfeit these benefits once the account is closed, so it's best to make use of them before initiating the closure.
Redeeming your rewards not only allows you to enjoy the benefits you've earned but also helps to ensure that you don't miss out on any valuable rewards that you may have forgotten about.
4. Contact Your Credit Card Issuer
The next step is to reach out to the issuer of your credit card to initiate the closure process. You can typically do this through their customer service hotline or online portal. When contacting them, be prepared to provide essential details, including your credit card account number, full name, and the reason for your decision to close the account.
During this communication, the credit card issuer may inquire about your reasons for closing the account. They might also try to offer you incentives or alternative solutions to keep you as a customer. It's crucial to remain firm in your decision and focus on your financial objectives.
5. Confirm Closure Request
After expressing your intention to close the credit card account, the customer service representative may transfer you to their retention department. The retention department's primary goal is to retain you as a customer, and they may employ various incentives and offers to convince you to keep the account open.
While some retention offers might be tempting, remember the reasons you chose to close the account in the first place. If you are certain about closing the credit card, kindly but firmly confirm your closure request.
6. Request Written Confirmation
To ensure that the closure process is properly executed, it's a good idea to request written confirmation from your credit card issuer. This written confirmation will serve as proof that you have voluntarily closed the account. It should include details such as the date of the closure, the account number, and any other relevant information.
Having written confirmation can be invaluable in case of any discrepancies or disputes that may arise in the future. Keep the confirmation document in a safe place for your records.
7. Cut Up Your Card
After confirming the closure request, it's time to take physical action. Cut up your credit card into several pieces to ensure that it is unusable. Disposing of the card securely will help prevent any accidental use or identity theft.
Cutting up the card serves as a symbolic act, signifying that you are committed to closing the account and moving forward with your financial plans without relying on that specific credit card.
8. Monitor Your Credit Report
Following the closure of your credit card account, it's essential to monitor your credit report regularly. Check for any updates to ensure that the closure is accurately reflected on your credit report. If you notice any discrepancies or errors, promptly dispute them with the credit bureaus to rectify the issue.
Monitoring your credit report also allows you to keep track of your credit score. While closing a credit card account may have some temporary impact on your credit score due to changes in credit utilization, responsible financial behavior over time can help you rebuild and maintain a strong credit profile.
9. Manage Your Credit Utilization Ratio
The credit usage ratio is a crucial aspect that, as was already discussed, affects your credit score. This percentage compares the amount of credit you are now utilizing to the total credit you have available. When a credit card account's closed, the amount of credit that is still accessible decreases, which can cause your credit usage ratio to rise.
To mitigate the impact on your credit score, consider reducing credit card balances on other open accounts to maintain a healthy credit utilization ratio. Aim to keep your credit utilization below 30% to positively influence your credit score. Responsible credit utilization demonstrates to creditors that you can manage credit responsibly.
10. Evaluate Your Financial Goals
Before making the final decision to close a credit card, take a moment to reevaluate your financial goals and objectives. Consider whether the benefits of closing the account outweigh any potential drawbacks, such as a temporary dip in your credit score. If the credit card no longer aligns with your financial needs or if its terms are unfavorable, closing the account may be a reasonable choice.
Consider your overall financial situation, including your debt management strategy, savings goals, and long-term financial plans. If you have multiple credit cards and find it challenging to manage them responsibly, closing one or more accounts might be a step toward simplifying your financial life.
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Conclusion
It's important to use caution while deciding whether to close a credit card account. It's important to comprehend how the closure may affect your credit rating and general financial situation. You may make a choice that is in line with your financial objectives by following the detailed instructions in this article and taking into account the key data on credit card usage. Remember that keeping a solid credit rating and achieving long-term financial success depend on using credit cards responsibly.
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FAQs
- Why would I want to close a credit card account?
A: There are various reasons, such as reducing credit exposure, simplifying finances, or avoiding annual fees.
- Is it bad to close a credit card?
A: Closing a credit card might temporarily lower your credit score, especially if it impacts your credit utilization ratio.
- What is credit utilization ratio, and how does it hurt my credit score?
A: The Credit utilization ratio is the percentage of your available credit that you're using. High utilization can negatively impact your score.
- Should I pay off my credit card balance before closing it?
A: Yes, it's recommended to pay off any outstanding balance before closing the credit card account.
- Can I redeem my reward points or cash back before closing the card?
A: Yes, make sure to redeem any accumulated rewards before initiating the closure.
- How do I start the process of closing my credit card?
A: Contact your credit card issuer through their customer service hotline or online portal to initiate the closure.
- What happens when I contact the credit card issuer to close the account?
A: They may transfer you to their retention department, which may try to retain you as a customer by offering incentives.
- Should I accept the retention offers to keep the account open?
A: Consider your reasons for closing the card and your financial goals before making a decision.
- How do I confirm my closure request?
A: Clearly express your decision to close the credit card account and request written confirmation.
- Should I cut up the card after confirming the closure?
A: Yes, cutting up the card ensures it cannot be used accidentally or fraudulently.
- How often should I check my credit report after closing the account?
A: It's recommended to monitor your credit report regularly to ensure the closure is accurately reflected.
- Does closing my oldest credit card hurt my credit score?
A: Closing your oldest credit card might impact your credit history and potentially affect your credit score.
- Can closing unused credit cards improve my credit score?
A: Closing unused cards may positively impact your credit score, especially if they had high balances or fees.
- Is there a fee for closing a credit card account?
A: Most credit card issuers do not charge a fee for closing an account, but it's best to confirm with them.
- Is reopening a closed credit card account in the future possible?
A: In some cases, it might be possible to reopen a closed credit card account with the same issuer.
- Should I close my credit card?
A: Deciding whether to close your credit card depends on your individual financial situation and goals. Consider factors like fees, usage, and its impact on your credit score. Evaluate the pros and cons before making a choice. If unsure, seek guidance from a financial advisor.
References:
- https://www.debt.org/faqs/americans-in-debt/
- https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf
- https://thehill.com/business/personal-finance/4023009-americans-owe-1-trillion-in-credit-card-debt/
- https://www.creditcards.com/statistics/credit-card-debt-statistics-1276/
