What to consider before closing credit card account

By Benjamin Salisbury

Whether you're cutting credit out of your life altogether or just trying to lighten your wallet, cancelling a credit card account deserves careful consideration. Closing an account can affect your credit rating. Here's what to consider before you close an account, and how to do it once you've decided.

Advantages to closing an account
Determining whether closing the card is best depends on what cards you have and what you might need credit for in the future.

"Overall, keeping a credit card account open won't have negative implications," Andrew Horne, a spokesman for the UK Cards Association, said in an emailed response to questions. But if a card is costing you money, it's time to shut it down. If the card has no fees but you simply don't use it, you don't have to cancel it but the issuer may shut it down for you, explained Horne.

close-credit-card

There can be several advantages in closing a credit card account:

  • You may become eligible for deals reserved for new customers. Keep in mind you must typically wait one to six months to be eligible to get those deals on a card you've already owned;
  • Closing an account can give you one less card to keep track of and reduce the risk of fraud;
  • You can cut back on annual fees, if the card in question has one;
  • Lenders could see unused credit as an added risk factor.

Other factors to consider
However, keep in mind that, while it's generally good financial house-
keeping to close credit products you no longer use, it's also useful to have
a credit card for emergencies, James Jones, a spokesman for credit
ratings agency Experian, said in an emailed response to questions. If need be, you can lock the emergency card away so you are not tempted to use it. Having that spare card can especially come in handy if your credit rating takes a dive and you become ineligible for credit in the future.

Closing your oldest card (or all your cards) can negatively affect you in lenders' eyes as well. Lenders (not only for credit cards, but for mortgages or vehicle loans) like to see a long, positive credit history. Closing your oldest card can take away a well-established track record.

In addition, closing all your credit cards means losing the protections of Section 75 of the Consumer Credit Act. Paying in cash or with debit cards does not offer such protection.

And while you may be eligible for tempting new card offers after closing an account, keeping the older card open can save you an additional credit check. Plus, the lender may offer you a better deal to try and make you use the card more regularly, so you may end up with a good deal anyway.

Finally, consider how it will affect your credit rating and score.

"If the card in question had a high credit limit or had been open quite a long time, keeping it open could help your credit rating," Jones said. "For example, credit scores often [show what percentage] of your available credit limits you are using, so a large unused limit on one card could be helpful there."

You should also consider your credit utilisation ratio, which can comprise a good chunk of your score. Most lenders want to see that you are using no more than 25% of the credit available to you, (and preferably over several methods, rather than just on one card).

For instance, if you have three cards with £1,000 limits and you owe £600 all together, you're only using 20% of your available credit -- an ideal ratio. But cancel one card, and suddenly you're using 30% of your available credit. Do the math, and if cancelling a card will bump you up to a 40% or higher utlisation ratio, consider paying down some debt before you close the account.

"For credit scores the key is having low balances, so if the cards have nil balances that is likely to help your credit rating," Jones said. "It always depends what else is on your credit report though."

How to cancel an account
There's more to cancelling a credit card than cutting it up. You must phone the card company and tell them you want to cancel the card. Ask for confirmation of cancellation in writing.

If you have outstanding balances, the issuer may keep the card open until you pay it off. Once you have, make sure the card account is closed.

And remember to keep your goal in mind. The issuer may offer you a tempting deal or even a cash incentive to keep the card -- if you're looking to cut back on your cards or available credit, be wary of this.

See related: Your options if your card issuer changes your agreement, 9 good habits of clever credit card users

Published: 6 March 2015