|Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
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Both my husband and I are recent college grads who are in over our heads in debt. My credit card is the worst and I was curious as to whether I need to cancel it or not.
We never use it, so is it really necessary to cancel it? What exactly happens when you close an account?
Is it a strike on your credit history to cancel a credit card? Is the only benefit of canceling a card the certainty of not using it?
Cynthia’s questions really go a bit deeper than just whether to close a credit card account. Underlying is an understanding that she needs to manage her credit. And we all should take an interest in that subject. Because how you manage your credit will determine whether you can borrow money in the future and how much you’ll pay for the privilege.
Before we look at her questions, let’s take a moment to look at credit management. Once we do, the answers to Cynthia’s questions will become clearer. There are two aspects of credit management that are important for individuals. The amount of credit you have available and your history of payments. The amount of credit available to you will be a concern for potential lenders. They look at a credit file to see how much you could charge or borrow without needing anyone’s approval. They’ll look at the total and decide whether they want to grant a loan that would add to that amount.
Every credit card in your wallet has a credit limit. If you total them all and add any other lines of credit you’ll find out how much credit you have available to you. Whether you intend to use it isn’t important. The fact that you could is enough for potential lenders. Too much credit available can raise the rate you pay to borrow.
You can also have too little credit. Closing your last credit card could leave you with zero credit available. That, too, would be a warning sign to lenders. 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. Obviously it’s best to have a record of paying your bills completely and on time. 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.
Now let’s get into Cynthia’s questions. First, is it necessary to cancel the card? The simple answer is no, it’s not really necessary. But it still might be a good idea. Especially if she doesn’t intend to use the card there’s no advantage to keeping it open.
Many companies will allow you to close an account by phone. Unless you need evidence that you closed the account, that should be sufficient. However, if you need to be certain, you’ll want to notify the card issuer by letter and keep a copy for your files.
OK, so 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 that could help your credit score. But a canceled account will still show up on your credit report. In fact, it will appear for seven years after the last payment on the account.
Canceling an account doesn’t have any affect on any balances owed or payments that are due.
Could Cynthia be penalized for closing her account? Canceling a credit card is not a “strike” against the card holder. It’s expected that you’ll open and close accounts as your needs change. One warning though: You can close too many accounts. People who are continually transferring balances and closing accounts demonstrate a pattern that concerns potential lenders.
Another caution is to make sure that the account is closed properly. It’s important to have the card issuer report that the account was canceled “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.
Finally, Cynthia hints at one advantage to closing the account for those who have trouble controlling their purchases. You can’t put charges on a canceled card. It’s also safer because thieves can’t use it either.
Should Cynthia close out the account? In most cases it’s not that important, but it is probably still worth the time it takes to close it.