Canceling a credit card can feel like ending a bad relationship—especially if it tempted you to spend beyond your means and didn’t give you any useful rewards. However, canceling a credit card isn’t always the best option if all you want to do is stop using it. To know if you should be canceling or simply cutting up your unwanted credit card, read on.

A quick note about terms used in this article. We will use the word “cancel” to mean closing a credit card account completely and not simply to halt charges on a card in case it has been stolen.

Consequences of canceling a credit card

Closing your credit card account can have the unfortunate consequence of temporarily dropping your credit score, because it lowers your credit utilization ratio.* This ratio measures how much of your total available credit you are using. The more credit you are using—i.e. the closer to you are to hitting the credit maximum on your cards—the worse the impact will be on your score.

For example:

  • If you have one credit card with a $1,000 limit and you’re carrying the maximum $1,000 balance;
  • And you have a second credit card number with a $1,000 limit and but a $0 balance;
  • Your credit utilization on both cards combined is 50% ($1,000 total balances ÷ $2,000 in total limits = 50% utilization).
  • If you close the second credit card, your credit utilization jumps to 100% ($1,000 total balances ÷ $1,000 total limits = 100% utilization).

*Be sure to read to the bottom to see how to avoid this credit score drop!

Circumstances when you should cancel

There are life and financial circumstances when it is in your best interest to close a credit card account entirely:

  • Separation or divorce from someone with whom you shared financial accounts. Joint credit cards should be closed as you’ll be liable for any past or future charges made on the account by the other person. A divorce decree might say your former partner is responsible for the debt, but that doesn’t absolve you from your obligation in the lender’s eyes. If you have the other person as an authorized user on an account you applied for, then you can simply remove them without canceling the card.
  • High annual fees. If a company charges you high annual fees for a card you rarely use, or for a card that doesn’t give you enough cash back or other perks, then canceling it is one way to keep that annual fee money in your budget to be better used elsewhere. But first, we recommend calling the company and asking for the annual fee to be waived. If you mention you’re considering closing your account, you might be surprised how quickly they waive the fee!
  • Too much temptation to use it and blow your budget. Our first suggestion would be to cut up the card so you can’t use it but keep the account open. However, this won’t work for everyone. If you’re working with a program like Debtors Anonymous or a financial advisor, they may advise this as a step in your financial health plan.
  • Part of a debt workout agreement. A credit card company may make closing your account a condition of a debt settlement or debt management agreement.
  • You have too many cards. It can happen—you signed up for every credit card promotional offer to get free airline tickets or other perks, but now you have too many. It can become overwhelming to juggle all the paperwork and mail, billing dates, changing APRs and perks, and increased fraud concerns.

In the end

The moral of the story is not to close a credit card account without looking at other alternatives that will help you curb spending but doesn’t endanger your credit score.

If you do need to close an account, do your best to bring all credit card balances to $0 before closing it. This will minimize or avoid any credit score damage as your credit utilization won’t be lowered because you aren’t using any of it! Also, if you can, avoid canceling your oldest credit card and/or the one with the highest limit. Length of credit history (attached to your oldest card) and total credit available are two factors in your credit score.

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