When Should You Cancel a Credit Card?

Cole Mayer  | 

Cancelling a credit card might hurt your credit, but sometimes it’s better to be rid of the account. It may be due to temptation to spend more than you have, or it might simply be due to the terms no longer being optimal. It may even be because you have too many cards open, and it’s a potential credit score risk factor. Let’s break down some of the reasons why you should cancel a credit card, and what it can do to your credit, so you know when the time is right.

What Happens When You Cancel a Card

Before we get into why you would want to cancel a card, it’s vital to know what cancelling a card will do to your credit. It’s not a decision that should be taken lightly.

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As cancelling a effectively card closes that account, it affects two significant factors of of credit: average age of accounts (AAoA), and credit utilization.

Older accounts mean a longer credit history, and generally give more confidence to lenders considering working with you. A closed account falls off your credit report 10 years after closing, and continues to age until about a decade later, when it is taken off your report.

The more pertinent hit to your score, however, is your credit utilization ratio. While a closed account will still contribute to your score, the lack of an associated credit limit will only be a detriment. For example, if you decide to close an account that you just paid off, with $0 out of $3000 used, you lose the 0 percent utilization of that card, far better than the recommended maximum of 30 percent.

A good rule of thumb is to keep your oldest account open. It may also have your highest credit limit, and keeping the utilization on an old account down contributes to both factors.

Despite these, there may still be reasons you want to close your account.

Curbing Temptation

If you already have too much debt, and are trying to curb spending habits, it could be wise to cancel cards that you haven’t maxed out. While there will be a credit hit, it may help with the temptation to keep spending. This is especially true if you have too many credit cards already.

While this may be a good personal reason, it will hurt your credit score. Consider debt consolidation in addition to closing the card this case.

Cosigners and Authorized Users

Cosigners or authorized users, if left unchecked with bad spending habits, could wreck your account, piling up debt and potentially hurting your credit score. Even loved ones can ruin your credit.

While it’s possible to close this account, it may be more worthwhile to remove the authorized user from the account if you have the ability to do so. For cosigners, you may be forced to close the account or switch to a product with the same lender, but a different card with new account permissions. This may only be an option if you have a good credit score.

You may take a credit hit for this, though in the long run, it will be beneficial — especially if the cosigner/authorized user is already hurting your score. Removing them or closing the account is the first step towards repairing your credit.

Annual Fees

If your card has annual fees that you no longer want to pay, you may consider closing the account to avoid the fees. Depending on the card, the fees could be anywhere between $50 and $500, a significant price to pay each year, especially if you do not redeem the rewards.

Before closing the account, however, consider switching to a card with downgraded rewards that might have no annual fee. This tactic is a favorite among credit card churners, who open cards, earn rewards, and keep cards open to keep their credit high. You may also be able to negotiate with the lender’s customer service to get the fee waived.

Unfavorable Terms

If the card has a high interest or low credit limit, or any other unfavorable terms, it may be time to cancel the credit card. If your credit score is high, you may be able to renegotiate the terms, or increase your credit limit. If your score is low, though, closing the card might be the better option (at least until you can build or repair your credit).

However, keep in mind that while a low limit won’t hurt credit utilization much, closing a credit card with a high APR if you pay on time and keep the utilization low could be a detriment to your score.  

For the most part, closing a credit card account should be a last resort. If possible, switch to a different credit card, instead, or simply leave the card open. While the lender may eventually close the account, if the card does not have an annual fee and has no balance, it will only serve to help your credit score.

Need to know more about credit cards before making the decision to cancel? Visit the Fiscal Tiger credit card learning center. For more information on credit scores, visit our credit score resource center.

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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42