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To Cancel or Not to Cancel…

To Cancel or Not to Cancel…

There seem to be more pros than cons when it comes to canceling a credit card.

By Gary Foreman

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While it's not necessary to cancel a credit card -- you can simply stop using it instead-- it's never a bad idea. Closing an account controls spending. It's also safer because thieves can't access the account either.

But first, consider your credit history.

Available Credit and Payment History
How you manage your credit will determine whether you can borrow money in the future and how much you'll pay for the privilege. There are two aspects of credit management that are important for everyone with credit cards: the amount of credit you have available and your history of payments.

The amount of credit available to you is a concern for potential lenders. Before they grant a loan, they look at a credit file to see how much you could charge or borrow without needing anyone's approval.

To determine this amount, total the amount of credit on all your credit cards and add any other lines of credit. Whether you intend to use this credit isn't important. The fact that you could is enough for a lender. Too much available credit can raise the rate you pay to borrow.

Too little credit is a warning sign to lenders, too. Generally only the young or people in financial trouble have no credit available to them.

Your payment history is the other big factor in your credit rating. Lenders understand that anyone can have one or two late payments in their life, but if it happens often you'll find yourself paying higher interest rates.

Canceling the Card
If you decide to cancel your credit card, figuring you have enough available credit without it, do it correctly.

Many companies allow you to close an account by phone. Unless you need evidence, this should suffice. However, if you need to be certain, notify the card issuer by letter and keep a copy for your files.

It's important to have the card issuer report that the account was cancelled "at the customer's request." That tells anyone checking your credit report that you made the decision to close the account.

If the card issuer initiates the account closing that would probably mean that the credit card company felt that you were a bad credit risk. Naturally, that doesn't help your credit rating.

Pros and Cons
What happens when you close an account? Basically the credit card issuer reduces your available credit to zero. That reduces the amount of credit available to you. If you have a lot of credit cards, this could help your credit score.

On the other hand, a cancelled account will still show up on your credit report. In fact, it will appear for seven years after the last payment on the account. It does not mean you have "strikes" against you, but if you close too many accounts, lenders might see a pattern that concerns them.

Most importantly, use credit wisely and make payments on time!

Gary Foreman has worked as a Certified Financial Planner and currently edits The Dollar Stretcher website

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