Why can credit card cancellation damage your credit score?

If you want to make your financial life easier and stop accumulating debt, cancelling your credit cards seems a good idea. Why have all these accounts open if they are tempting you to spend more and more money? But keep in mind that closing your accounts may actually lower your credit score. 

The fewer credit cards you have, the easier it is to prevent excessive spending. When you carry over five credit cards in your wallet, it is difficult to remember which plastic you use, which plastic you don’t use, how much money you have on this card and what your spending limit is on that card.

By cancelling some credit cards, you simplify your money management. It will be more convenient to track your expenses and control the total level of debt when you have just a couple of plastics in your pocket. However, a card-cancelling strategy is not for all.

Credit bureaus consider the utilization ratio – the percentage between the total amount of your debt and available credit. When you cancel a credit card, you reduce your amount of available credit, but your debt remains the same. Thus your credit utilization ratio will increase. 

For example, you have two credit cards, both with $5,000 spending limits. You have a $2,000 balance on one of the cards, or about 20% of your total available credit. If you close the second plastic, you will then be using 40% of your available credit. It will increase your utilization ratio and damage your credit score.

In addition, keep in mind that 15% of your FICO score is determined by the length of your credit history. The longer you have had an account, the more weight it carries. Credit card cancellation won’t let you benefit from a long credit history.

That’s why you should be cautious if you are going to take a car loan or mortgage in the nearest future. Due to your damaged credit score, you may get worse terms and features than you have expected. 

If you are not going to take loans or if you don’t have any balances, go ahead and cancel your credit cards. Yes, it may lower your credit score, but it will keep you from accumulating debt. And you can build up your credit rating paying all your bills on time. 

Closing an account correctly takes time, patience and organization. If you plan to close several accounts, do one at a time. When you decide which accounts to cancel, first choose plastics that have the highest finance charge. Cancel new cards before old cards. 

Don't try to cancel a credit card while you are paying the balance. Otherwise, banks can raise your interest rates. It is better to employ self-discipline and stop using a card while you are covering your debt.

If you throw away or cut up your plastics, it doesn’t mean that they will stop working. You just won’t be able to use them. However, you can easily reorder these credit cards anytime you want because your accounts will not be closed. 

Moreover, the plastics that you have thrown away or put on a shelf can be stolen by thieves. It will be an unpleasant surprise to get enormous bills for the credit cards you have forgotten about. So closing your accounts instead of just throwing your credit cards away will protect you from identity theft.

The first step is to contact your lender. Call the customer assistance department (the number is on the back of your credit card) and tell them that you want to cancel your plastic. Then you need to send your request in writing. 

Don’t forget to check your credit report after you have closed the account. You need to make sure that everything is correct. There should be a notice that the account is “closed at customer’s request”. 

If you see that it is “closed by creditor”, you have to repeat the process. Call the credit cad issuer to report the mistake, follow up with a letter sent by certified mail, and check your credit report again.