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Sunday, June 16, 2019

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The ins and outs of canceling credit

The ins and outs of canceling credit

Many people work very hard to establish their credit, feeling a great sense of accomplishment upon being approved for a new account with a high limit and affordable interest rate. But as beneficial as strong credit can be, there are instances when canceling a credit card is the right move.

Canceling a line of credit is not as simple as cutting a credit card into tiny pieces or shredding it in a paper shredder. But before you begin the process of canceling an account, it's first good to consider the reasons it might be wise to cancel the card in the first place.

* Annual fees: Some cards come with annual fees. Not to be confused with interest charges, which only accrue when cardholders do not pay their balances off in full and on time, annual fees are part of your initial agreement with the creditor, who will charge you an annual fee regardless of whether or not you make any purchases with the card. Cardholders often bemoan such fees, especially when they pay their balances in full and on time, avoiding interest charges as a result. If annual fees truly bother you, then there are plenty of credit cards that do not charge such fees, and you may be happier with those cards than your existing card.

* High interest rates: High interest rates are another reason many people decide to cancel their cards. This is understandable, especially for those cardholders whose credit score has improved since they initially received their card. The better your credit score, the lower your interest rate should be. Some credit card companies will lower interest rates for valued customers. If your company won't budge, then you can likely find a better interest rate with another creditor.

* Too many accounts: Some men and women may feel that they just have too many existing lines of credit, which can be difficult to monitor. In addition, too many accounts can leave you more susceptible to identity theft. If you have numerous credit cards but find yourself only using one or two, consider canceling those extra accounts that you rarely use.

* Curtail spending: Credit can easily be abused, and many people have found themselves in financial hot water because they put too much on plastic, piling up debt along the way. If you feel your spending is out of control and your wallet full of credit cards isn't helping, then canceling some accounts in an attempt to curtail that spending is as good a reason as any to cancel a card.

Canceling an account
Though canceling an account can be good for a variety of reasons, men and women should know that canceling a line of credit can initially have a negative impact on their credit scores. Lowering your existing credit may simultaneously lower your credit score. A good credit score can go a long way toward helping you secure a home or auto loan, so it's important that you're in a position to handle a temporary setback to your credit score when you cancel an existing account. If you're on the verge of applying for a loan, you might want to wait until after your application has been approved to cancel an account. Though temporary, a dip in your credit score, even if that dip was caused by something you consider a positive, may hurt you if it happens at the wrong time.

Another thing to consider before canceling an account is the potential hit that such a cancellation may have down the road. Closed accounts with zero balances and no negative payment history can stay on your account for as long as a decade, helping you to maintain a good credit score that whole time. However, once that decade is up, that positive history is up as well.

Cardholders also must consider the balance-to-limit ratio before canceling their cards. The balance-to-limit ratio compares the amount of credit being used to the total amount of credit available to the borrower. A low balance-to-limit ratio is a good thing, whereas a high ratio can hurt you. If you plan to cancel a card but have existing balances on other cards, your balance-to-limit ratio will suffer, as your balance will remain the same but your available credit will go down. So before canceling a card, it's a good thing to pay off balances on all of your cards. Once you have, your balance-to-limit ratio will be zero no matter how much credit is available to you.

When the time comes to cancel a card, do so through the customer service number on your card. This number should be the same as the number listed on your monthly statement and the issuer's Web site. Simply cutting the card does not cancel the card; it just means you can't use it anymore. The card must be officially canceled through the issuer for the account to be considered closed. The balance also must be paid in full for the account to be closed, and all interest charges must be paid. When speaking with the customer service representative as you cancel the card, make sure there are no lingering interest charges. If there are, pay them immediately over the phone and then close the account.

Credit card issuers often try to persuade cardholders to keep their accounts open, but cardholders who gave their decision significant thought and made that decision for the right reasons should stick with their initial decision and close their accounts regardless of how tempting the issuer's offer to keep the card open might seem.