You need to be careful when you are closing a credit card account. You want to make sure that if you will be closing an account, it will only bring improvement to your finances. There are many things that can happen but you can prevent the negative ones if you know what to anticipate.
Sometimes, one of the causes of debt is having too many credit cards. While it is very convenient to use, it brings a lot of opportunities for abuse. Some people look at their credit cards as an extension of their wallets. If this happens, you will feel a false sense of purchasing power.
This is the reason why it is safer for you to just close the credit card account that you do not use.
Of course, if your reason to close your account is because of the high fees, interest rate, or credit limit, these can be negotiated with the creditor. You can ask for a lower rate, fee, or you can ask them to just waive it. If you are specifically bothered by the credit limit, then just ask the creditor to lower it. This will still affect your credit score through the credit utilization rate. However, it will not be as significant as when you close it.
These are just some of the alternatives that you have to close a credit card account. But if your reason for closing is because you are not using the card anyway, then it makes sense to close the account.
How to close a credit card account
If you are sure that you want to close your account, here are some of the rules that you need to follow to ensure it’s beneficial to you.
Close credit cards you are not using
One of the best reasons to close a credit card account is when you are not using it. Even if it will damage your credit utilization, it will still be beneficial for you, in the long run, to just close it. Reports reveal that the cost of owning credit cards is rising. Apart from the high-interest rates, you have to pay annual fees and other charges. It’s acceptable to pay for all of these if you are using the card. But if not, then you are just throwing away your money.
Have a repayment plan for any balance left
Some people are under the impression that they cannot close their credit cards if it still has a balance on it. Technically, you can close it. You are allowed to do that as long as you continue to pay your balance. For instance, you can use a balance transfer to pay off the debt. Of course, before you go down this path, you may want to consider the credit score implications. Closing the account while it still has a balance will raise your credit utilization rate.
For instance, your total balance is $4,500 and your limit is $15,000. If you close a card with a $4,000 limit, that would take your credit utilization rate from 30% to 40%. That can affect your credit score negatively.
You should also make sure that after you close your card, none of the fees will be charged. If there are, make sure you pay for it and none will be left. Do not forget about it just because the credit card account is closed. That will still make the account delinquent even if you already closed it.
Keep other credit card accounts open
Although having a lot of debts put you through a lot, it should not lead you to eliminate debt from your life completely. You still need it to maintain a good credit reputation. It will still open financial opportunities for you. However, you need to learn how to manage it. In fact, it will not really matter how many cards you have. If you can manage all of these properly, then you should not have a problem at all. So keep some of your credit cards open. Just make sure these are the cards that you use regularly.
Check your credit report regularly
After you close a credit card account, you need to monitor your credit report closely. Check that there are no more entries on that account. If there is one, then you need to file a dispute. Apparently, 1 out of 4 consumers have discovered an error in their account and 7 out of 10 have at least one dispute that remains unresolved. The rule is for the credit transactions to be reported to credit bureaus but unfortunately, this does not always happen. So you need to be vigilant with your own report. Make sure your report is updated all the time. If not, then call the attention of the credit bureau.
What not to do when closing a credit card account
Apart from the tips mentioned, there are also things that you need to avoid when closing a credit card account.
Don’t throw the card and think it is closed
Credit cards will not close just because you stopped using it. You still need to call it in so the credit card company will process the closing of the account. If you just put it aside after paying off its balance, the zero balance will not stay. Even if you cut up that card, it will still rack up annual and membership fees. And when you fail to pay these off, you will be charged with late penalties. So even if you do not use it, there will be a balance after a month or so. This is why you need to go through the process. Make sure you inform the credit card company that you plan on closing the credit card account. Listen carefully to make sure that you will follow the process well. And do not stop monitoring your bills until the card is closed.
Don’t take their word for it
You need to ask the creditor for a written confirmation that they closed the card. The date should be duly noted because that is when they should stop charging the usual fees associated with it. This is also why you need to monitor your credit report closely. You want to make sure you have paid for everything completely. Leaving even a dollar or less will grow if you do not pay for it. You can thank the late penalty charges for that. You might end up with a delinquent account. After all the hard work you put into fixing your finances, this might make you feel frustrated.
Don’t close your oldest card
Ideally, it is not advised to close the oldest card that you have. That is because it is the marker for your credit history. If you had that for the past 5 years, that means your credit history is that long. Closing the oldest card would mean the data associated with that card that dates back for 5 years will be gone. If your next oldest card is 3 years, then your credit history will only be 3 years. In case you need a good credit score in the near future, closing your oldest card might not be a good idea for now.
Don’t cancel cards at the same time
If you want to cancel more than one credit card account, make sure you time it well. Do not close it all at the same time. Wait a couple of months before you close another. This will still affect your credit score but it will not be as much as closing cards at once. Besides, this will look suspicious to your creditors. If you are trying to improve your credit history and reputation, it will not help if you do this.