New credit card offers are hard to ignore. A 50,000-mile sign-up bonus or zero percent interest rate for 12 months can be enticing. But once the value of a card diminishes and you stop using it, you might be tempted to close it.
It’s not always a good idea to close a credit card account, but if you do, there are important steps you should take to make sure you close it properly.
Should You Close Your Credit Card Account?
Matt Schulz, chief industry analyst at personal finance site CompareCards.com by LendingTree, says, “When it comes to your credit, you’re generally better off leaving a credit card open and not using it rather than closing it,” particularly if you have few positive credit score factors.
[Read: Best Grocery Credit Cards.]
Before you decide whether to store or close a card, it’s important to assess the potential impact to your credit score. As Schulz says, “Closing a card can potentially ding your credit in a few ways, but you can minimize much of the risk if you’re smart about how you cancel it.”
Your repayment history, a major factor for your FICO credit score, shows whether you’ve paid on time. If you have a positive payment history, keeping your account active can retain your account’s good standing.
The positive repayment history associated with an open card stays on your credit report indefinitely. But closed accounts that were paid as agreed are only reported for up to 10 years. Conversely, a negative payment history can really hurt your score. You can’t close a credit card until the balance is paid in full. Even then, closing a card won’t make a negative payment history disappear. It can stay on your credit report for seven years from the original delinquency date before the slate is wiped clean.
Another key factor in your FICO score is your credit utilization ratio, which compares the amount of credit you’re using with how much you have available. In general, lenders look for a ratio of 30 percent or less as a sign that you can manage your debt.
According to credit expert John Ulzheimer, formerly of FICO and Equifax, “Closing a credit card can have a negative impact because you lose the value of the unused credit limit. If your debt represents a larger percentage of your credit limit, this can result in a ratio spike and a lower score.”
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Pros and Cons of an Unused Credit Card
As these examples illustrate, it might be in your best interest to store unwanted cards in a safe place and leave the accounts open. Be sure to safeguard the account numbers to prevent fraud. Just because you’re not using those cards doesn’t mean someone else can’t. Also consider using these cards periodically so your issuer doesn’t opt to close your account.
Keeping an unused card costs you nothing unless you’re paying an annual fee. In that case, says Schulz, “It can be wise to close it. It likely doesn’t make sense to pay that fee for a card you’re never going to use.” Of course, when you close it, you give up the buying power of that card, and that can hurt in an emergency. For instance, if your car needs major repairs or your refrigerator dies, that extra card can be a lifesaver, especially if you don’t have enough savings to cover the expense.
But if you find that having too many cards tempts you to spend more than you can manage, closing accounts can help you get your spending under control.
So, should you ever close a credit card? If doing so won’t negatively affect your credit score, go ahead and empty that drawer of unused plastic. But make sure you’re following the appropriate steps to avoid unnecessary fees, problems with automatic payments and other issues that can pop up.
[Read: Best Balance Transfer Credit Cards.]
Eight Steps to Close a Credit Card Safely
If, after weighing the pros and cons, you decide to close a card, follow these eight steps to make the process go smoothly:
— Talk to your card issuer about your payoff amount. Don’t assume that your statement balance is everything you owe. Ask the issuer for your payoff amount, which includes your current balance, plus interest and fees. Unless you remit the full payoff amount, your card will maintain a balance, and interest and fees can continue to accrue.
— Redeem rewards. If you’ve amassed cash back, points or other rewards, use them before you close the card or you’ll most likely lose them. One exception is co-branded travel cards, which usually transfer rewards from the credit card to the loyalty program each month, so they should not disappear. It’s a good idea to ask your card issuer for details and follow the expiration rules of the loyalty programs so you don’t lose them.
— Update automatic payments. If you’ve used the card to set up automatic payments, switch those payments to another credit card or link them to your checking account before you close out your credit card. Otherwise, the payments won’t be made, and you could be hit with late fees or lose a service altogether. To be sure you’ve caught all recurring payments, look through several months’ worth of statements.
— Talk to authorized users. The same applies to every person permitted to use the account. If you have authorized users on your account, give them ample notice that you plan to close it and by what date. They, too, will need to make other payment arrangements. You also don’t want them to continue using the card between the time you pay it off and request final closure. An authorized user is not the same as a joint cardholder. If you have an authorized user on your card, only you are responsible for the bill, no matter who incurs the charges.
— Pay off or transfer your balance. Paying off the card is one option. But if you’re not prepared to remit the payoff amount, you can transfer the balance to another card, preferably one with a lower interest rate. If you don’t have another card, be sure to set up the new account before you close the old one.
— Confirm your zero balance. Never assume anything. After you make the final payment, call the issuer again to confirm that there is no balance left on the card.
— Request account closure. With a zero balance, you can now instruct the issuer to completely close the account. Don’t be surprised if it offers you a bonus to keep the card open, but if you don’t want the card, stand firm.
— Dispose of the card. After you have final confirmation that the account is closed, get out your scissors and cut up the card, or put it in a shredder.
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How to Close a Credit Card the Right Way originally appeared on usnews.com
