Canceling Your Credit Cards—How to Do It and Why

Take the right steps if you're planning to give back a credit card

Some experts might throw up their hands in dismay and shout, "No!" at the idea of canceling one or more of your credit cards. Depending on your personal situation, they might be right. Others will nod understandingly and agree that maybe you really don't need all those cards.

The bottom line is that you must approach the situation carefully. You can damage your credit score if you close the wrong cards or too many cards, and it's usually not necessary if you have the self-discipline to simply stop using them instead. That said, keep a few things in mind if you're determined to clear out some room in your wallet.

Determine the Best Accounts to Keep

Decide which credit cards you want to close and which ones you want to keep open. Fish out the oldest one first and set that aside. You'll want to keep this one, even if its annual percentage rate (APR) is the highest. Part of your credit score is determined by the length of your credit history. You'll shorten that length if you close your oldest credit card, lowering your score. You don't want that.

Identify the card with the lowest APR. You'll want to keep this one alive and well because it costs you the least to keep and use.

Redeem Rewards First

Don't leave money on the table. Many credit cards offer rewards—they'll give you cash back or something like half-price accommodations on your next vacation in exchange for charging and spending on their cards. This is literally free money, so you'll want to either use the awards first or keep the cards for a while longer until you do use the perks.

Deal With the Balances

It's possible to close a credit card that's carrying a balance, but that balance won't go away. You'll still owe it—you just won't be able to use the card any longer. But you do have an option here.

Consider transferring the balance to a card you're keeping. Many offer special perks for this, such as a lower interest rate for a period of time. Look at it from their perspective: You're using their card, not someone else's, and you're paying them—not another lender—that interest.

Another consideration is that credit cards companies are more willing to work out a payment plan with customers who have open, not closed, accounts. Your initial lender doesn't want to lose your business, either. It might negotiate a lower interest rate with you.

The flip side is that you're stuck paying the balance back on the current terms of your card agreement if you close the account and it still has a balance on it. The lender might even be able to raise the interest rate on your closed account balance going forward as the market adjusts, just as it might if you had left the card open.

Adjust Automatic Payments

That dental insurance premium might only be $60 a month, so you barely even think about it because the insurer automatically charges your card each month. But you'll think about it a lot if you close that card, the charge isn't honored, and this results in an avalanche of fees from both sources.

Don't neglect to notify any other creditors that the account is now closed and provide a new account number if you've been using the card for any automatic payments.

Keep Authorized Users in the Loop

You might have authorized someone else to use your card, maybe your spouse or your child as you help her to build credit of her own. Don't neglect to let her know what's going on so she doesn't try to use the card only to have it be declined...with no other way to pay for the purchase she was trying to make.

Close the Accounts

Each lender can have varying processes for closing accounts, so check in advance to find out what's required of you. Take notes if you do so over the phone so you have a record of what you've been told. Of course, a better option might be to discuss the situation via email so you have proof of what was decided.

Send a Backup Letter

Most companies require a signature and proof in writing before they'll be willing to close an account, so a phone call probably won't do it in the first place. Send a letter confirming the closure via USPS, return receipt requested, so you know it's reached the credit card company. You should request that the company send you a letter stating that the account has been closed.

Make Sure the Account Is Closed

Follow up in about a month or so to make sure the account has been closed. Never assume without checking, especially if the card had an annual fee. Missing a payment can ding your credit score even if you're unaware that it's due because you think the account is closed.

Check Your Credit Report

Give it a couple months for everybody to catch up, then pull your credit report as well to make the account shows up as closed. Sometimes these channels chug along slowly.

Contact your lender again and ask them to report the account as closed to the credit bureaus if the information doesn't show up there within a reasonable period of time.

You can ask the credit bureau to check into the account for you if the closure still hasn't been reported after six months.

Some Tips for Financial Health

You might want to just stop using the card after you've paid it off so you're no longer carrying interest on your purchases. It won't cost you a dime, assuming that lender doesn't charge you an annual fee. As an added bonus, another part of your credit score is determined by how much credit you have available—the ratio of your credit limits to your outstanding balances—so you might want to keep at least one credit card available with a zero balance.

You might want to consider keeping the card anyway if it's just a modest annual fee. Isn't knowing that card's always there in an emergency worth $25 a year or so? Of course, if you're dealing with a self-discipline issue—you know you'll use the card if you have it and not necessarily for an emergency—then you might want to cancel it and save yourself the $25.

Close the accounts that cost you the most in annual fees and exorbitant interest rates, but let the lender know that this is why you're doing so. You might be able to negotiate a lower rate or no fees if you agree to keep the card.

Don't forget to safely dispose of the card when all is said and done! Snip it, shred it, do whatever is necessary to make sure it can't fall into the wrong hands, even though the account is closed. The lender will assume it's you if anyone should try to use it.