Credit cards offer you a line of credit that can be used to make purchases, balance transfers. And/or cash advances and require that you pay back the loan amount in the future. When using a credit card, you will need to make at least the minimum payment every month by the due date on the balance.
ATM cards are not credit cards or debit cards. ATM cards are payment card size and style plastic cards with a magnetic stripe. And/or a plastic smart card with a chip that contains a unique card number and some security information such as an expiration date or CVVC (CVV).
Are Credit Cards Good or Bad? Credit cards are neither good nor bad. They are financial tools that must be used with care. The dangers include running up debt, missing card payments, carrying a balance and racking up interest charges, using too much of your card limit, and applying for too many cards at once.
What Is Credit Card
A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder’s accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the other agreed charges).
The card issuer (usually a bank or credit union) creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance. There are two credit card groups: consumer credit cards and business credit cards. Most cards are plastic, but some are metal cards (stainless steel, gold, palladium, titanium), and a few gemstone-encrusted metal cards.
A regular credit card
A regular credit card is different from a charge card, which requires the balance to be repaid in full each month or at the end of each statement cycle. In contrast, credit cards allow the consumers to build a continuing balance of debt, subject to interest being charged. A credit card differs from a charge card also in that a credit card typically involves a third-party entity that pays the seller and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date.
A credit card also differs from a debit card, which can be used as currency by the owner of the card. In 2018, there were 1.12 billion credit cards in circulation in the U.S., and 72% of adults had at least one card.
How To Cancel A Credit Card
Sometimes a credit card is no longer the right fit and it’s time to consider canceling it. It may be because life circumstances change, card benefits change, or any number of other reasons. If you’re thinking about canceling a card, you should consider whether it will impact your credit or if there’s a better option, like downgrading or product-changing to a different credit card. If you’re still sure you want to cancel your card, there are a few steps to follow to do it the best way.
When to Cancel a Credit Card
For some, canceling a credit card may end up being a relief. Beyond a celebration following digging yourself out of credit card debt, there are a variety of other reasons to cancel a card. Not using a card, wanting to reduce the number of cards you have, not wanting to pay hefty annual fees, or switching brand loyalty from one hotel or airline to another are all great reasons to close a credit card account.
Whatever your reason maybe, you’ll likely wonder what will happen when you take this step. Will it hurt your credit? When do you have to pay your balance? We’ll look at some of the reasons you might cancel a card and things you need to consider before, during, and after the cancellation process.
What Happens When You Close A Credit Card?
When you close a credit card, you’ll no longer be able to use it. You’re still responsible for making payments on the outstanding balance of the card. Depending on the type of rewards earned from the card, you may lose access to them. It’s important to consider your rewards before closing an account.
Similarly, closing a credit card can impact your credit score. You should understand how your credit score can be impacted before you close a card to avoid any unintended consequences.
Consider If You Really Want to Cancel Your Credit Card
Even if it’s a card you’re not regularly using, there may be some reasons to keep a card open. If the card has an annual fee and the benefits don’t justify the annual fee, it doesn’t make sense to keep paying the annual fee.
If this sounds like a situation you’re in, you have a couple of options. The first is to call the credit card company to see if it will offer you a retention offer. It costs banks and credit card companies a lot of money to attract new customers, so these entities are often willing to incentivize current customers to stay.
If you call and say that you’re planning to cancel, it’s possible that you’ll be offered an annual fee refund or a statement credit, bonus miles or points, or some combination to keep your card open. It may require spending a certain amount of money within a specified time period, similar to earning a welcome bonus. You’ll have to decide if the offer made (if an offer is made) is worth your while.
Another option is to downgrade your credit card to another card without an annual fee from the same issuer. This allows you to keep the account and credit line open but without having to pay for it. Different banks have different rules and not all permit doing this—most banks have requirements about when a card can be changed and which cards it can be changed to.
Also keep in mind that if you keep a card open but never use it, the credit card company may choose to cancel the card. To avoid this, consider putting a small charge on the card periodically.
Does Cancelling a Credit Card Hurt Your Credit?
Many specialists advise against closing a credit card because there’s a risk it will negatively impact your credit score. This risk exists even if your balance is zero on the credit card you want to close.
Closing a credit card can trigger an unintentional increase in credit utilization. Credit utilization—or the percentage of your credit limit you’ve used—is a major factor that influences 30% of your FICO Score.
How is this possible? Say for instance you have a credit card with a $1,000 limit and a $1,000 balance. Your second credit card, the one you’d like to close, has the same $1,000 limit, but a $0 balance. With both of these cards, your credit utilization is 50%. However, if you close the second card, your credit utilization will rise to 100%—a major factor for credit score calculations.
You can calculate your overall credit utilization by dividing your total credit balances by the total of all of your credit limits. Then you cancel one of your credit cards, you will have a lower amount of total credit available. If you’re carrying a balance on any of your other credit cards, this will increase your credit utilization rate. If your utilization is too high, you will likely see a negative impact on your credit score.
Credit Card Payment History
Your credit card payment history matters and it won’t be erased once you close your account. Late payments or other older issues won’t go away; the account will read, “closed” on your credit report—not disappear entirely.
Your balance is important when closing a credit card. It doesn’t only matter how much you owe on the credit card you’re trying to close—the amount you owe overall is what matters.
Length of Credit History
Try to keep the oldest credit card account you have open. The longer an account has been open, the better it is for your credit score. Sure, if the terms are no longer favorable and you can’t afford the fees, closing it might be a better option. But even then, it may be worth trying to talk to your credit card provider to see if they can give you a better deal that will help you keep the card. If you downgrade to a card without an annual fee, you will keep the same account history.
Closing accounts too quickly after opening an account isn’t always a great option. Closing an account too quickly can indicate risk to lenders and negatively impact a credit score or the likelihood another lender will work with you. This is especially true if you’re young and have a short credit history.
Credit mix refers to the types of credit accounts you have: credit cards, mortgages, car loans, etc. Closing a credit card account can impact your credit mix. You should thoroughly consider whether closing your card is the best option.
Reasons to Cancel a Credit Card
Everywhere there are cons, there are pros. Several circumstances justify canceling a card despite the risk to credit.
1. Separation or Divorce
If you have a joint account with a spouse, it is generally best to close the account as soon as separation begins. While that account exists, you’ll still be liable for any charges on your credit card.
An angry ex who runs up excessive charges and takes off can mean a major bill for the unexpecting divorcee. Even if separation is amicable, small daily charges can still be made without malice and both parties still share responsibility.
2. High Annual Fees
No one appreciates high annual fees. While there are instances where the benefits outweigh the costs, it’s common to find yourself paying an annual fee and not using the benefits at all. In these cases, it may be best to close the card.
Before you do this, call your credit card provider and talk about the fees. The issuer may be willing to waive them, especially if you mention you’re considering canceling your account. It also may be possible to downgrade to a lower- or no annual fee version of the card.
3. Too Much Temptation
The temptation to spend money we don’t have is a dangerous problem for many of us. Sometimes closing an account makes more sense than tempting ourselves to spend money we don’t have.
Before deciding to close an account and potentially impact your credit, it may be worth trying to solve a spending problem another way. You could, for instance, leave the card at home when you know you’re going shopping. Alternatively, you can ask someone else, like a spouse or trusted relative, to keep the card for you and only provide it to you for necessary purchases.
Check the Timing on Your Card Benefits
Another thing you should check before canceling your card is the timing of any card-specific rewards or benefits. If you have a card with a relatively simple earning structure, like the Citi® Double Cash Card or the Chase Freedom Unlimited®, there’s not much to do. However, some other cards have time-sensitive rewards that you’ll want to consider before closing. For example:
- Many hotel credit cards like the Marriott Bonvoy Boundless™ Credit Card* offer a free night on your account anniversary. Check when that free night gets posted into your hotel rewards account to see when it might make sense to cancel the card.
- Other cards, like the Southwest Rapid Rewards® Priority Credit Card offer points on your cardmember anniversary.
- Some cards offer bonus points in certain categories each quarter, up to a certain limit. If you’re in a quarter where you have a relatively easy path to maximizing your bonus, consider holding off on canceling until you’ve maxed out your bonus.
- Many credit cards offer travel benefits like free checked bags, airport lounge access, or a better boarding order. If you have a trip coming up where you might take advantage of those benefits, consider holding off on canceling until after your trip.
How to Cancel a Credit Card in 6 Steps
Once you decide to cancel a credit card, here’s how you can shut it down:
- Start by redeeming any unused rewards before canceling.
- Pay off or down all of your credit accounts—not just that of the account you’re canceling. Canceling a credit card with a $0 balance can still hurt your score if your balance is positive on other cards because your credit utilization will increase.
- Call your credit card issuer (or check online) to confirm your balance is $0.
- Contact your credit card issuer to cancel your account. Request a written confirmation that your balance is $0 before closing.
- Thirty to 45 days after cancelation, check your credit report. You want to see a report that the account was closed by the cardholder and that the balance is $0.
- If there are any issues, open a dispute with the credit bureaus.
Once a card is closed, dispose of it. Get out your scissors (or tin snips if you have a metal card!) and cut up your card. You should also update your records with the cancellation date. This is important because many cards have a fine print negating eligibility for welcome offers for those who’ve opened or closed an account within the past 24 to 48 months. Knowing your card cancellation date can help you want to apply for the same or another card again in the future.
However, if there is anything you think we are missing. Don’t hesitate to inform us by dropping your advice in the comment section.
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