Too many unused credit cards in your wallet can means it’s time to consider cancelling some of them. However, proceed with caution when cancelling your credit cards, as each cancellation takes its toll on your credit score. By learning about the correct way to cancel a credit card, you can lessen the impact on your credit history.
First, before you make that telephone call, make sure that all the balances on your credit cards are paid in full. A credit card cannot technically be cancelled if you continue to carry a balance.
Debt-to-Credit Ratios
The first step in deciding which cards to cancel is calculating your debt-to-credit ratio, or credit utilization, on each one. This is the ratio of credit you use on your credit card, compared with how much credit you have available on it. For example, if you have two credit cards, each may have $1,000 of available credit. You then make a major purchase, using all of the $1,000 of credit on the first card. The second card has a zero balance. Divide the amount of credit you have available to you on both cards together by the amount of credit you are using. In this case, you are left with a utilization ratio of 50 percent.
However, if you cancel the credit card that is not being used, this will bring your credit utilization rate up to 100 percent. The higher the utilization rate, the worse the impact it has on your credit rating. You want the lowest utilization rate possible.
Consequences of Cancelling a Credit Card
If you are set on cancelling all your credit cards except for one, then there is an easy way to preserve your credit score by keeping your utilization ratio down. Ask your credit card company if it can increase your credit limit on the card you wish to keep. Another important criteria on your credit score is credit history, so you don’t want to cancel a card that you’ve had a long time. The newer the card you cancel, the less impact it will have on your credit score.
Rather than officially cancelling your credit card, you can simply cut it up. If an emergency arises and you need access to that credit, it only takes a quick phone call to have the company mail you a new credit card for that account.
According to a credit specialist at President’s Choice Financial, when you cancel a credit card, it is reported to the credit agencies. This will affect your credit score. You can switch to another credit card, but this will cause a further dip in your credit rating as new credit extended to you always results in a temporary ding to your score. Cancelling one card to get another is not a very good plan. Again, if you must cancel a card, cancel the one that is the newest. By keeping a credit card that you’ve had for several years, you will be preserving your credit score, particularly if you have an excellent history of timely payments.
Once you have decided which credit cards to cancel, it’s time to call the credit card company. Once you have spoken to a representative at the company, make note of the time, date and the person’s name. The next step is to write a letter directly to the company to ask for written confirmation of your cancellation. This will be filed in your credit report specifying that the account was closed at the request of the cardholder. Keep a record of everything, in case there are any disputes down the road. The final thing you need to do is obtain a copy of your credit report so you can check it for accuracy.
