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How to cancel a credit card without hurting your credit score

INDONESIAKININEWS.COM -  Are you thinking about canceling your credit card? Maybe you don't want to pay the annual fee, or you're no...



INDONESIAKININEWS.COM - 
Are you thinking about canceling your credit card? Maybe you don't want to pay the annual fee, or you're not using the rewards program enough to benefit. 

While there are plenty of good reasons to cancel your credit card, you should understand how closing your account could negatively affect your credit score.

There are a series of factors that can hurt your credit score and you want to make sure you don't add to the list. But if you do currently have a poor score (or just not enough credit history) you can start improving it today. Credit repair experts are ready to assist you.

Before you cut up your card, however, familiarize yourself with the consequences of closing your account and the steps you should take to close it the right way.

Does closing a credit card account hurt your credit score?

Canceling your credit card can negatively impact your credit score in two main ways: 

Lower credit utilization ratio

One figure that accounts for 30% of your credit score is your credit utilization ratio. Your credit utilization ratio is the amount of credit you use compared to your available credit. So, if you carry a $3,000 total balance across all your credit cards and your total available credit is $10,000, your credit utilization ratio is 30% (3,000/10,000 = 30). Credit experts recommend keeping your credit utilization ratio at 30% or below (the lower, the better).

In this example, if you close a credit card with a $4,000 credit limit, your total available credit would fall to $6,000 ($10,000-$4,000 = $6,000). With that same $3,000 balance, your credit utilization rate rises dramatically to 50%, which could damage your credit score.

Reduce the average age of your accounts
Another critical factor in your credit score is the average age of your accounts. The longer you've been managing credit, the better it is for your credit score. Your score considers the average age of all your accounts, so closing your older accounts could impact your score more than a new account would.

If your credit utilization ratio is poor or if your average age of accounts is limited, your credit score could suffer. If either of these applies to you it may be worth speaking with an expert who can help improve your score. 

When closing your credit card makes sense

While closing your credit card could negatively affect your credit score, there are instances where it may make sense. 

Your card has an expensive annual fee: It may not be worth carrying a card with a steep annual fee, especially if you aren't using the rewards. 

The card carries a high interest rate: It's understandable if you want to cancel a credit card with a high interest rate. But keep in mind, you can avoid paying interest altogether by paying off your balance each month or by not using the card at all.

You're going through a divorce or separation: Closing a joint credit card with your spouse or partner after a breakup may be a logical choice. Doing so could help keep your finances separate and avoid any surprise purchases on the card from your ex.

Your card leads to overspending: If you have a habit of maxing out your credit card, closing your account could help you gain control over your spending. 

Your card doesn't match your spending habits: You may get more value and maximize your rewards earnings by switching to a card whose benefits align better with your spending habits.

Alternatives to canceling your credit card
If you want to avoid canceling a credit card and potentially damaging your credit, consider the following alternatives to help you meet your objectives.

Negotiate for better rates or another card
Sometimes the best option is to have an honest conversation with your card issuer. Inform them you're thinking of canceling your credit card and you'd like to explore your options. 

For example, if you want a lower interest rate or a card with no annual fee, see if your card issuer can transfer your account to a different card that better meets your needs. This allows you to keep your account open.

Transfer your balance to a lower-interest card
You can save money on interest charges by transferring your balance on a high-interest credit card to one with a lower interest rate. You can transfer the balance to another card or a new one and keep both of your accounts open. Remember, it's better to keep unused credit cards rather than cancel them since it keeps your credit utilization rate lower and your length of credit history higher.

How to cancel credit cards without hurting your credit

Before you cancel your credit card, it's important to consider the potential damage to your credit score. Why is that important? Because good credit can be the deciding factor that determines whether you can get a mortgage, car loan or student loan or other forms of credit. 

By contrast, bad credit makes it challenging to get approved for such products, and the cost of borrowing is typically higher than for those with good credit. 

Nevertheless, if you've decided to cancel your card, here are the steps to complete the process. 

Check your outstanding rewards balance. Some cards cancel any cash-back or other rewards you've earned when you close your account. If you have rewards points, redeem them, or you could forfeit them.

Contact your credit card issuers. Call your credit card company to determine your payoff amount and process the account closure. Verify that your account balance is zero. Your card will be canceled instantly, and you should receive a written notice verifying the closure.
Send a follow-up letter. 

Although this step is optional, you may want to send a confirmation request by certified mail. Request that your card issuer reply with a written confirmation your account is closed with a $0 balance, and keep that letter for your records.

Check your credit report. Roughly 60 days after closing your account, verify that your credit report demonstrates that your account is closed at your request. 

Destroy your card. Once you have confirmed your account is closed, you can help prevent fraud and identity theft by cutting up your card and tossing it.

Should you cancel your credit card?
The decision on whether to cancel your credit card is one that only you can make after weighing the advantages and disadvantages.

If you're worried about your credit score taking a temporary hit, consider alternatives like negotiating for better terms or switching to another credit card from your issuer. However, if the temptation to overspend with your credit card is too great, canceling the card may make sense.

And if you've already hurt your score by canceling a card prematurely? You have options to help rebuild it. Get started with the credit repair process now.

Source: cbsnews


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