Canceling Cards
Posted by John Draper | Filed under Credit Wise
People are always writing to ask what the impact will be on their credit history if they cancel their cards or reduce their limits. I’m not surprised that people don’t know what to do because so much MISinformation is available. I was browsing around the web the other day and came up this advice:
If your credit card balance is zero, go ahead and close as many unused accounts as you want. As long as your credit cards are balance-free, it won’t hurt your credit score a bit. So call those card issuers and cut away.
DON’T. This advice is wrong. That’s the problem with looking for advice on the web; unless you get a S’mbody who knows what she’s talking about, you can do yourself more damage than good.
Here’s the problem with the advice: If the card you cancel has a long and lustrous credit history associated with it, as soon as you cancel the card, you lose the credit history. Ooops!
Okay, so you’ve had a bunch of cards in your wallet and you’re determined to trim your exposure to credit, here’s what you should do:
Look back over your credit card statements to see which ones are the oldest and have the healthiest credit histories – read “no missed or late payments”. You’re going to hang on to these to keep your history intact until you’ve built a sparkling credit history elsewhere.
Choose the two (at the most) cards that you want to keep. These cards should have lots of benefits: cash back, really low interest rates, whatever toots your horn.
If the card(s) you want to eliminate has a good history, start by reducing the limit on the card to reduce your credit exposure, but keep the card active. After six months, you should have built up a more solid history on your two newer cards, and can close the old card(s).
When you are reducing your credit limits, do NOT reduce your limit to the point where your balance is greater than 60% of your limit. So, if you have a current balance on the card of $1000, you’re limit should not be less than $1,700. Why? Cos part of the credit scoring system looks at how much of your limit you’ve used up. The more often you bump your head against your limit, the lower your score. That’s why paying off $50 and then immediately lowering your limit by $50 can do more harm than good.
When it comes to cancelling the card, first make sure you’ve redeemed all your rewards (cos they are HI-STO-RY) and also – very important — make sure there is a zero balance on the account. Lenders freak if you try to close an account with a balance, even if it’s because they just threw some interest on a card you thought you’d paid off in full. So before you cancel, call customer service and make sure the balance is zero. Then:
Ask to cancel your card. If the sales rep promises you her first born to keep the card, stand your ground. Remember, you’ve already chosen the card (or two cards, AT MOST) that you’re going to keep.
Send written confirmation to the card issuer and keep a copy on file. Fax it if you can so you have a record of its receipt. Ask for written confirmation of the account being closed.
Once you receive confirmation that the card has been cancelled, wait about six weeks and then check your credit report. Remember, it’s your responsibility to verify that your credit report is accurate.
While it can be pretty dramatic (like on TV!) to simply cut up your cards, doing so does nothing to close the account. However, if you want to avoid the temptation to use a card you’re committed to cancelling, nothing beats a pair of sissors!
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September 22, 2008 at 10:41 am
Thanks Gail!
I knew about all of the other stuff, but didn’t realise that you should stay under 60% of the total credit limit of the card in order to get the best possible credit rating! It is something to think about when lowering one’s credit exposure (I’ve just halved my limit to do just that).
Thank goodness I keep my balance at zero — using my credit card only for internet transactions or large lump-sum payments. I love your advice and your show. Thank you so much for sharing your thoughts (time and energy).
September 22, 2008 at 11:10 am
Gail, I have a question — why do you say maximum two cards? Is it bad for your credit to have more than two credit cards? I have three credit cards but never carry a balance and have never come even close to my limit. I have them for different rewards — one gives me a discount on gas, one gives me grocery money back, another gives me airmiles and a free membership to a discount shopping program. But if it would improve my credit rating to have just the two credit cards, I would gladly do it.
September 22, 2008 at 11:13 am
I feel like I have too many cards, but I get myself caught in a loop when I try to figure out what to do about ‘em ..
- a MC with about a $9000 limit
- an Air Miles amex with an $8000 limit
- a bank Visa with a $10000 limit
Total: $27-thousand in credit, plus a bank line of credit. All three have solid, clean histories according to my Equifax report.
I’ve had the MC the longest — about 15 years. It’s no-annual-fee.
The Air Miles gets me Air Miles — had that one a good long while. The bank card is newer, but it’s with all my other banking and gets me points.
So, the first-thing-that-makes-sense thing to do is to just cut the limits on all the cards … beyond that, I’m stumped.
September 22, 2008 at 11:50 am
I am surprised at one recommendation from Gail.
To me, if you wish to close an account, you want to check your credit report BEFORE you close it in case there is a mistake and to make sure that you have an R1 rating on the card before it is closed. A company may not care about fixing a mistake once your account is closed. If the rating is poorer, than R1, you do not want to close the account until the last report states R1. Poorer ratings seem to stick around longer than good ratings.
Opinions?
September 22, 2008 at 12:19 pm
Hi Gail – I have a question about credit history…
I got married two years ago, and I assumed my husband’s last name (I didn’t change it legally). All of my IDs have my married name now, except for my SIN. So my one and only credit card (with about 8 years of good history on it) has my married name on it now. How does this affect my credit history, if at all?
September 22, 2008 at 12:49 pm
Kait: I say two cards because for most people the more the cards the more the temptation. If you have special purpose cards and pay them off every month, you can have three or four cards. Just don’t let them keep raising the limits.
Bigasssuperstar: Ditto. If the cards are working FOR YOU and you’re not carrying a balance, then you’re okay. However, if you EVER make payments on those cards from your line (PAY OFF THAT LINE!) then the points are just an excuse to have plenty of cards.
Alla, it doesn’t matter what your name is as long as all your names are recorded on your credit report. I’ve had quite a few names myself and I’ve never had a problem.
September 22, 2008 at 4:37 pm
Oh Gail, I’m a good boy
.. I’ve only ever used the line o’credit twice — ‘cuz it came with cheques, and I’m embarrassed to use my so-old-the-blank-spot-still-says 19__-on-’em cheques, so I put ‘em on the LOC cheques…then promptly paid off the LOC before the end of the week.
With a wedding & home purchase ahead in the next year, though, .. oh, boy, I’ll have to put all my good-boy practices to the test. Thanks for all you do!
September 22, 2008 at 5:24 pm
I’ve canceled cards I hadn’t used in years but they still show up on my credit report as “Closed on customer’s request”. Does it mean that the closed cards remain on file but are not used for computing the credit score? I’ll check the credit report later in the evening and report back.
September 22, 2008 at 5:40 pm
@ Canadian Capitalist – The last credit report that I obtained from Equifax still showed my TD Visa card (closed in 2005) and my Future Shop store card (closed in 2005 as well). My Equifax report says that those closed accounts would still show on my report until after 6 years from the date of last activity.
I have to wait unti 2011 before my record regarding my TD Visa and my Future Shop card will be dropped.
September 22, 2008 at 7:11 pm
My most recent credit report showed the CC”s that I requested to be closed @ my own request. My credit rating is an R1, I’m assuming that’s good? I checked out the web site but couldn’t find anything that said what they stood for!
September 22, 2008 at 10:55 pm
I cancelled my (rarely used) co-branded Amex card only to have my bank phone me up and beg me to take it back! I guess the bank must have targets of cardholders to reach/maintain. I did take it back because a) it doesn’t a separate credit limit (it’s one limit combined with my Visa) and b) the bank agreed to waive the annual fees for both of the cards – I saved a few dollars! And of course, the Amex card has remained a ‘virgin’.
September 23, 2008 at 5:22 am
CC: While accounts closed at the customer’s request can remain on your credit history, they are often dropped from the credit scoring mechanism, lowering your credit score. Sadly, lenders have become Lazy Louts and like to simply go with the score instead of doing the full 5′C investigations that they used to do.
September 23, 2008 at 9:52 am
Gail: Thanks for your explanation. That makes sense.
September 29, 2008 at 5:42 pm
There is one point I do not understand. Why should anyone lower his limit on cards?
What I know is that for your score they also look at how much credit you have access to and how much of that you actually used.
I knew that for best scores it is best practice not to use in a month more than 20-25% of your limit. So on a 10K card use 2000-2500 at most in the month.
And at the end of the month pay it in full. The golden rule.
Now it seems that a person with a 1000 limit is less well regarded than a person with 10000. It shows you have access to credit but you do not use it.
So why would you lower a 10000 card to a 3000 one?
September 30, 2008 at 6:42 am
Remus: From what I understand, when you want to get a loan of any type, they will look at your available credit (such as $10,000) and use it against you as that is potential other debt that you could end up owing. If you bring the amount down to $3000, that’s $7000 less debt that you might get yourself into to.
If it’s there, it can be used, so lenders consider that.
September 30, 2008 at 7:17 am
Right on, Emma.
November 17, 2008 at 1:12 am
So Emma and Admin in this case what would you consider a “should have” credit limit on a card say?
10.000 is too much from what I see people saying here…
I mean we end up having credit so low then that it affects our day to day activities. You can have a 1000$ card and your monthly expenses on it to be 2000 and you top it up with money to keep up. Which again is not good when you go over your limit. However I don’t know if it makes any difference if you make payment to it throughout the month. I had 1000$ card and used 2500 on it but I put money on it 2-3 times a month so make up, you know what I mean.
Again I am talking here about people paying the balances in full at the end of each month.
Secondly: the unsecured lines of credit, which are nice to have and I have been hunting one for my girlfriend (pre-approved ones I mean) even though it just sits there unused have a little catch. The larger the limit the smaller the interest. On 8000 it had like 12% on 14.000 is 9%. Once you end up to 25.000 is even less. Is good to have in case you need to use it. But according to this theory you should lower it too no?
November 17, 2008 at 6:47 am
Remus: the point is not that you should go out and lower your limits, particularly if you pay your cards off in full every month, just to have lower limits. You have to keep a limit that works for your. The point is that it’s detrimental to your borrowing ability to have 5 cards each with $10K limits since lender look at it as you already having borrowed $50K. So, if you have one card with a high limit, and that meets your needs, so be it. But be careful about racking up more cards with high limits since if you ever need to borrow for something like a car or a house, the outstanding credit limits will count against you. As for having a line of credit just in case you need to use it, that’s exactly how people get into debt!
November 17, 2008 at 5:05 pm
I am all for using 1 good credit card. Have 1 that works for you and that’s it. But if you do the math nowadays it should be one with at least 8-10.000 on it so you never pass the 25-30% limit on it. I know you said no more than 60% but from what I’ve read it’s not good practice for best scores to use more than 30%. However I don’t understand if that applies to people that carry a balance on it from month to month or even to people that pay it off in full at month end. Because I can use 8000 on my card each month and pay it in full and be on 0 then. Honestly I don’t think this would be against you. Having a credit card should help you, if you go through all these problems to reduce limits to the extend when it’s a pain to simply use it because of all the constraints you’ll end up doing nothing. Maybe one idea would be before a big purchase like a house to lower all your limits… then they will see a different story.
The idea behind the line of credit is to have the means to borrow some money at a good rate in case you need to. At a first question to the bank, on a general term they said their car loans run at around 10% (TD bank was this). So who in his right mind would borrow money at 10% when you can access a line of credit with 7.5 for instance. The line of credit would be used only when it is the cheapest way to finance something that you need and you know you will pay back
thanks
March 6, 2011 at 2:21 pm
I think you are all missing the point about maintaining the balance to 25% or so of the limit. Yes you have a grace period, but it’s not like the interest rates you are earning in your savings account are so high that you are making more than a few cents by delaying payment till the due date.
Use your credit cards only when you have the ability to pay the balance in full without delay. Track your statement dates (easy enough) and make sure you pay your balance in full a few business days before your next statement date.
In this fashion, no matter when your credit report is reviewed, your balance owing will always be at or near zero – and thus maximizing your credit score in this context.
March 6, 2011 at 2:28 pm
Furthermore, if you manage your credit score always to best advantage, this business about unused credit limits will be a non issue. Proper score management should yield a credit score north of 770. Assuming your income and net worth are respectable and “qualify”, most lenders will find a way to meet your borrowing needs.
This is less true if you are looking for a personal line of credit or even a small business line of credit. Then all your available credit usually comes into play.
But if you already have an available line of credit, most people can forget about being approved for a second one.
And if you don’t have a personal line of credit already, yet have a fair amount of available credit by way of credit cards, you may well find that the various low rate offers your card companies are throwing your way will make the interest rate on a LOC gigantic by comparison.
For example, I know of several people right now enjoying (renewing) priviliges of 0% interest on their Royal Bank Visa cards. (yes that is zero percent !)