What Happens When You Cancel a Credit Card?
From a behavioral standpoint, it can make sense for an individual to cancel a credit card. The plain truth is that since credit cards are often misused, they are not for everyone.
When credit cards are responsibly utilized as a means to build a track record of timely payments that helps build (or rebuild) a credit score and profile, that’s good. When credit cards are effectively utilized to balance a monthly budget when cash flow runs irregularly, or when a credit card is simply kept on hand for emergencies, that’s good.
When balances on credit cards are kept to a minimum so as to reduce interest expense, that’s also good. However, when credit cards are used to live beyond one’s means and a pile of debt insidiously grows with associated high interest expense – that’s not good.
For many individuals, onerous credit card debt becomes a stressful part of life and it can then become a good idea to simply cancel some or all credit cards. But, what happens when credit card accounts are closed out? What are the pros and cons? Let’s take a closer look.
Cancelling a Credit Card - Pros
Before closing an account and taking the scissors to the card, it’s important to know that cancelling a credit card will not remove the balance owed or the payment history associated with the card – this should be fairly obvious.
After a card is closed, monthly payments must still be made as usual, and the credit card issuer will continue reporting your repayment behavior to the three major credit bureaus (Equifax, Experian and TransUnion).
The primary benefit to closing a credit card account accrues to those individuals who have difficulty controlling their spending habits. Cancelling the card becomes a self-imposed behavioral limit on spending – and preventing oneself from falling into a rising pile of debt is certainly an important benefit to those who need it.
A secondary benefit can come from removing any high annual fees that a card may charge. A high annual fee can simply make holding onto a card not worth the cost.
Cancelling a Credit Card - Cons
When a credit card is cancelled, it will almost always have a negative impact upon an individual’s FICO credit score. This is primarily because of something knows as the the credit utilization rate – or the percentage of available credit that an individual has currently borrowed.
The credit utilization rate is a significant contributing factor (approximately 30%) toward the calculation of a credit score. Lenders prefer a credit utilization rate below 30%, as it illustrates an ability to pay for basic necessities without needing to rely upon credit cards and other forms of debt.
It is important to recognize that since closing credit card accounts reduces the total available credit, this causes the credit utilization rate to rise and the FICO score to drop. The rule of thumb is – the higher the credit utilization rate, the lower the credit score.
The good news here is that in both cases, any reduction in credit score can be temporary and easily recoverable through the timely monthly repayment of remaining debts in the individual’s credit profile.
How to Cancel A Credit Card
If you decide to cancel a credit card, there is a proper way to go about doing things. First off, if you can’t pay your balance in full, look for a balance transfer to a different promotional rate credit card to save on interest expense on the remaining balance owed.
Secondly, redeem any rewards points you may have before closing the account, as you will lose the rewards points once the account is closed. Next, contact customer service and inform them that you will be closing the account.
Confirm any amount of remaining balance and verify that the account has been closed. After sixty days, go to annualcreditreport.com and retrieve one of your free credit reports (you are allowed one from each of the three credit reporting agencies each year) to make certain that the account has been reported as closed.
At this point, you can take the scissors to the card and dispose of it properly, making certain that your name, card number and security code are irretrievable to any potential identity thieves.
No one really wants to go bankrupt, and neither did my family
No one really wants to go bankrupt, and neither did my family. But fortunately, we did not have to go that route. It was our last resort, but United Settlement helped us figure out a way around bankruptcy...
I had been through about 5 different credit counseling agencies before I found United Settlement
I had been through about 5 different credit counseling agencies before I found United Settlement. I had read through their reviews and made the decision to move forward with them. I also was so impressed...
As a business facing some unwanted financial difficulties
As a business facing some unwanted financial difficulties, we were at a loss for what to do next when our debt started to soar. We took a closer look at our financial situation by contacting United Settlement....
I had no clue how to create a debt management plan
I had no clue how to create a debt management plan and in fact, I didn't even know what a debt management plan was. Fortunately, I reached out to United Settlement before I had too much debt to tackle....
Being burdened by debt is one of the biggest struggles we faced as a family
Being burdened by debt is one of the biggest struggles we faced as a family. But these people at United Settlement were very helpful in deciphering the different debts we had and then coming up with a debt...
Student loan debt was my worst enemy before I ran into United Settlement
Student loan debt was my worst enemy before I ran into United Settlement. I really thought I would just have terrible credit for the rest of my life because I will never get out from underneath it. It was...
I never thought about settling our credit and auto loan debts
I never thought about settling our credit and auto loan debts. I honestly thought the only way out of our situation was to go bankrupt. But that all changed when we reached out to United Settlement. We...
We were dealing with extremely high-interest rates on debt
We were dealing with extremely high-interest rates on debt. That made it difficult to make improvements in what we owed. We were pretty much devastated. By our debt because we really wanted to buy a house...
Auto loans are my family’s biggest problem
Auto loans are my family’s biggest problem. Sure, having them is a necessary evil in our modern era. We spent years trying to pay our auto loans off. But the problem was, we never could make headway....
Bankruptcy was not an option I wanted to use
Bankruptcy was not an option I really wanted to use. I wanted to find an alternative to this process that would enable me to get rid of my debt for good without having a bad mark on my credit history. That...
United Settlement was there for me when I could not be there for myself
United Settlement was there for me when I could not be there for myself. I was not sure how to move forward when I had a massive amount of debt. I could not figure out how to get out from under the seemingly...
I had no idea that I could reorganize my utility builds or residential leases
I had no idea that I could reorganize my utility builds or residential leases. But United Settlement helped me see that I could. They were very friendly in telling us about what our options were as a family...
Everybody knows how ridiculous student loans are
Everybody knows how ridiculous student loans are, and that was not lost on me when I chose to take out hundreds of thousands in student loan debt. Relieving a measure of pressure for my student loans was...
Restructuring business debt is not an easy thing to do
Restructuring business debt is not an easy thing to do. But United Settlement was great at helping me figure that out. Understanding financial situations and goals was what I really wanted, and they did...
I had no clue that I was paying more than 100% APR on my small business loan
When I reached out to United Settlement, I had no clue that I was paying more than 100% APR on my small business loan. I could not believe it! But I was paying that much which meant I could not ever get...
Handling my business debt was not something I looked forward to
Handling my business debt was not something I looked forward to. But United Settlement was so patient with my questions and helped me figure out how to handle my debt as a small business owner. I qualified...
I didn't even know what type of interest rates there were and how those affected my debt overall
When I contacted United Settlement, I didn't even know what type of interest rates there were and how those affected my debt overall. So, when I went to go buy a new house, I was shocked to find out that...
Debt settlement is what we signed up for when we were interested in using United Settlement
Debt settlement is what we signed up for when we were interested in using United Settlement. We needed a company to negotiate on our behalf to help us reduce the total amount of debt we owed, and we were...
I had no idea that I could lower my credit card interest rates. But when I contacted United Settlement, they explained to me that I could negotiate my interest rates down lower along with my payoff balance....
If you have ever had an unmanageable amount of credit card debt
If you have ever had an unmanageable amount of credit card debt, you know how ridiculous it is to try to pay it off. In my situation, I did not want to wait until the last moment to get this debt under...