A credit card can be a blessing and a burden. For example, a credit card can give you somewhat of a lifeline if you run out of money. You can use a credit card to get you through the month until you get paid. They can also help you build and improve your credit report meaning you get better rates and more chance of being accepted for credit. This is extremely beneficial if you are trying to get accepted for a mortgage.

However, a credit card can also be like a noose around your neck. For some people, a credit card hangs over them as a reminder of the debt they owe. Or, what is perhaps even worse, some people do not associate credit with real money, completely forgetting it has to be paid back. This can lead to spiralling debt that comes back to haunt them. Also, although a credit card does provide a lifeline when you have no money, it can make things worse.

For example, if you cannot afford payments, charges are added, which means you owe even more debt. This will also negatively affect your credit rating. This will mean it will become harder to get credit, and the credit you do get is more expensive.

This article will explain how you can cancel a credit card. It will explain the reasons for cancelling a credit card and when is the best time to do it.

What should I do when cancelling my credit card?

There are a number of steps you should take to close your credit card account. The first thing to do is inform your credit card provider. You can do this over the phone, in writing, or online in some cases. Credit card providers often offer you a better deal to stay, so this could also be used as a bargaining strategy. You may want to pay off the outstanding balance first, though it is possible to cancel your credit card account without doing this first. However, it is important to remember cancelling your credit card does not cancel the debt, any outstanding balances must be repaid. You could also shift the remaining debt to a balance transfer card. These usually have zero or lower interest rates.

If the balance has been repaid, you should cancel automatic repayments. For example, if you have a direct debit repaying the credit card balance, you should cancel it. Or, if any subscriptions are paid for using your credit card, you should cancel them. It is also best to send an email to your card issuer confirming you have cancelled your credit card. This means if they dispute it, you have recorded evidence.

After some time, you should also check your credit report. This should show if your credit card is cancelled or active. It should also show if cancelling your credit card has had any impact on your credit rating.

Why should I cancel my credit card?

There are many reasons to cancel a credit card. For one, if a credit card provides you with no benefit, you may just have no need for it. It also reduces the chance of fraud. If you have fewer accounts open, there is less risk of fraud. If you pay back your debt in full, it will also drop your credit utilisation ratio. Credit utilisation below 30% of your total limit improves your credit score. Also, having too many credit cards will likely lower your credit score, as will having an unused credit card. Also, having multiple credit cards is harder to keep track of, and you may accidentally forget to make a repayment. Again, this will have a negative impact on your credit score. So, it may be worth cancelling some credit card accounts to streamline your finances and improve your credit score.

As well as having no need for unused cards you may also use them too much. For example, if you have a large credit limit on your card but not much income, you may be tempted to make an expensive impulse buy. Or, you may be continuously tempted to make small impulse buys. This could push you way beyond your budget, meaning your finances becomes stretched beyond your means. You may just want to limit your temptations so you can budget better or save money.

You may want to cancel that particular credit card because the interest rate is too high. Card issuers may sometimes offer you a better new deal in this case. You may be able to get a better deal elsewhere also. For example, you could get an interest-free credit card or one with a larger credit limit. So, it may be better to cancel unused or less beneficial credit cards and switch to a new card provider.

Why should I not cancel a credit card?

Sometimes, if you cancel a credit card, it can damage your credit score. This has to do with credit utilisation. If you have credit on another loan or another credit card, but the credit card you are cancelling has no debt, it can push up your credit utilisation ratio. This is because you are reducing your overall credit limit by cancelling that card. As the ratio measures your overall credit limit against the percentage of that limit, your credit utilisation will rise. Pushing credit utilisation above that 30% benchmark will trigger a reduction in your credit score.

Also, it removes an emergency lifeline. If you get locked out of your normal bank account or you run out of cash, this can give you a lifeline. Or, if you have no money in the bank and have to make an essential emergency payment such as car repair, emergency dental treatment or life-saving vet bills, it gives you that option. Cancelling a credit card removes an emergency backup.

Also, if you have had a credit card account open for a long time with the same company, they may have rewarded you with benefits you may not get elsewhere. For example, they may trust you more if you have a long credit history with them of regular payments. They may trust you more, rewarding you with a high limit of credit. Even if you can get a better interest rate elsewhere, you may not be able to get the same or a better limit. So, you may want to keep your credit account open in case you need to make a large purchase down the line. A credit history with long-standing accounts also generally improves credit scores. It may be a balancing act to try and decide whether or not to close an unused credit card or keep it because it is a long-standing account.

On this note, Ted Rossman, industry analyst at Bankrate.com, stated:

“You should keep old accounts open to boost your credit score because scoring algorithms look favourably upon long-standing accounts and more available credit.”

Why would a lender cancel a credit card?

In some cases, the choice to keep or cancel your account and card is made for you. A lender can and may cancel your card at any moment without prior warning. There are a number of reasons why they may do this. For example, an unused card is not profitable for the company. So, if it has been inactive for some time, they may cancel it. If you have missed a repayment on your account, they may suspend your card until it has been paid. If you have not made a payment in a certain period of time -typically six months they may cancel your account completely.

A lender can also cancel your credit card if they believe you may not be able to make repayments. For example, if credit card reference agencies highlight a forecasted inability to make payments or drop your credit score, they can preemptively strike and close your account. Even if you have a consistent repayment history. They cannot raise your interest as a result of a worsening credit score, but they can cancel your account instead.

A lender must give you advanced notice of 45 days if they plan to increase prices. For example, they must first tell you if they are raising the price of interest repayments or the annual fee. If you reject the new terms, they may close your account. Also, the lender may withdraw that particular card across the entire company as they believe it is no longer a good fit for them anymore. In this case, you may be offered an alternative new card, but the old card will be cancelled. The company or bank itself may collapse, as was seen during the 2008 financial crisis. The private bank Northern Rock collapsed and was later nationalised during this time. In this scenario, the lender will cease operations and be forced to close accounts.

When is the best time to cancel a credit card?

When the negatives outweigh the positives, that is when it is the best time to cancel. For example, if you pay a high annual fee but stop using the card, it makes sense to cancel. Also, whenever overspending on your card becomes a serious problem, even an addiction, that is another great time or trigger to cancel. Also, to avoid raising your credit utilisation percentage, only cancel the card if it will not push the ratio above 30%.

Also, if you just want to get out of debt entirely, the perfect time to pay it off is as soon as you can. Even your political and ethical viewpoint on the world may change, meaning you do not want to partake in the credit system or want to be off-grid. Likewise, the best time to pay off your card is as soon as you can.

If you can get a better deal elsewhere for cancelling and switching to a new card or account, it is a good time to do so. Also, if you have larger credit needs coming up, such as a mortgage, it may be best to pay off and cancel your card first to improve your credit score. This is especially beneficial if this is your only credit line, as credit utilisation won’t be affected. However, it may be worth keeping a small residual balance on the card to maintain a history of credit.

There is no perfect time to cancel your credit account. The best time must be weighed against the personal goals and needs in life and how greatly cancelling or not will affect them. This includes financial, ethical, and lifestyle choices.

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