What You Need To Know Before You Cancel A Credit Card Account

Many people have more credit cards than they need. It's all to easy to send off another application when you get a great offer for a new credit card, but in many cases they go unused. Even worse, they can lead to excessive debt for some people because of poor financial discipline. Many people deal with this by deciding to cancel credit card accounts. There are several things to consider before cancelling your accounts, however.

First, it's not a good idea to cancel a credit credit card that still has a balance owing. Many credit card companies have a cancellation penalty, where the interest rate will be increased to the maximum level if a card is cancelled while still carrying a balance.

It is best to pay the card off completely before canceling your account.

Next, consider how cancelling a credit card can affect your credit score. Yes, it seems a little illogical that having fewer credit cards would hurt your credit score but it is possible.

Your credit score is partly based on the total outstanding balances on your credit cards compared to the total available credit. If you cancel a card that has a zero balance, it can actually hurt your score by increasing this ratio.

For example, let's see what happens if you have 4 credit cards with a total available credit of $8000 and a total balance of $2000 outstanding. For simplicity, we'll assume each card has a credit limit of $2000.

Currently, the ratio of outstanding credit to total available is .25 ($2000 divided by $8000). If you cancel one of the cards with a zero balance, that ratio will increase to .33 ($2000 divided by $6000).

Because the ratio is higher, this can have a negative effect on your credit rating. If you are planning to apply for a mortgage, car loan, or some other type of financing in the near future you may be better off keeping the extra cards until after the financing has been approved.

How To Cancel Your Card

If you have decided that canceling your card is the best option, it will depend on the credit card company's policies exactly how you do it. Some require a cancellation in writing while others will let you do it over the phone.

If you are able to cancel by telephone, be prepared to have one of the customer service reps try to convince you not to cancel. It's likely they will spend 10 or 15 minutes trying to get you to keep the card.

This may include special offers, such as waiving an annual fee, lowering the interest rate or offering extra bonus points such as Airmiles.

It's worth listening to these offers as it may be that you decide to cancel a different card after hearing what they are willing to offer you. If the offers don't interest you, however, don't allow a slick sales pitch to change your mind - you get to make the final decision, after all.

Read the next article to learn about credit card help for students.

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