How to cancel a credit card
By Susan Jane
Cancelling a credit card involves more than just cutting up the card. Closing your account the wrong way can actually damage your credit score. Here are some things to consider before you impulsively cancel a credit card.
Protect your credit history and score
Consider the possible effect of cancellation on your credit history and score. Even after cancellation, the account information isn't necessarily deleted from your credit history. Positive credit data on an open account can stay on credit reports indefinitely. Closed accounts with zero balances and no associated negative information typically remain on a credit history for 10 years from the date they are reported as closed.
In recent years, credit card providers have focused more on the amount of credit still in use at the time of cancellation. This is because credit bureaus and lenders are most interested in your balance-to-limit ratio, or the utilisation ratio, which compares the actual amount of credit being used to the amount of total credit available to the borrower.
Future lenders (e.g., for a home or personal loan) will view a low balance-to-limit ratio as a strong indicator of a good credit risk. When you close a credit card account to move to another provider, it is a good idea to negotiate an increased credit limit so the ratio is maintained. If the new provider will not approve an increased credit limit, closing the existing credit card account could damage your credit score. This is because the utilisation ratio will automatically increase because the total amount of available credit decreases.
To prevent this negative impact on your credit score, you should ensure there are only zero balances on your credit report for all your active credit cards. With only zero balances, the credit utilization rate is therefore also zero and cannot be raised to potentially damage your credit score because you have closed one or more of your active credit card accounts.
Also consider the impact on your credit score of having access to a credit limit that is too high in relation to your income. Future lenders will want to be sure you can afford all your financial commitments. Sensible use of credit facilities will demonstrate financial stability and prove you are a good credit risk.
Another vitally important consideration is the age of an existing credit card account. Credit card accounts with a long history are often valuable to your credit profile and have a positive impact on your credit score. Don't impulsively throw away the most valuable element of maintaining a highly positive credit history and credit score.
Before you close a credit card account
Here are just a few things you will want to do before cancelling your credit card:
- Ensure all recent purchases have been recorded on your account.
- Arrange cancellation of all direct debit payments that are deducted from your credit card prior to the credit card cancellation.
- If an additional card holder is linked to your account, make sure you include this information in your cancellation request. Some organisations will require this to be in writing.
- Document the phone or in-person discussion about the cancellation, or print any relevant e-mails. Note the transaction number, date and time of call, the name of the person you are dealing with, and details about cancellation procedure.
- Keep copies of any paper documents involved in the cancellation.
- The balance of your account must be zero before you can close it. This could involve calculation of interest owing and/or debiting any other fees associated with cancellation to produce a payout figure.
- If there is the possibility of a credit balance, indicate how you want this cleared to show a final zero account balance. That is, by transfer to a nominated account or by cheque to your postal address.
- You should receive a final statement of account showing a zero balance. Retain this as a record of the credit card account cancellation.
Published: July 20, 2009