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By Jasmine Birtles, financial expert from Moneymagpie.com
Having a credit card can be incredibly useful – it can help you manage your cash flow, spread the cost of purchases and be a lifesaver when travelling.
However, some cards are definitely better than others. Having the wrong card is one of the easiest ways to build up debt.
Unfortunately cancelling a card isn’t quite as simple as just cutting it in two. There are certain guidelines you need to follow if you want to avoid being penalised.
Why cancel?
You might want to consider cancelling your credit card(s) if any of the following apply to you:
- You tend to rack up debt easily
- Your card is hitting you hard with interest charges
- You have plenty of old cards you don’t use
- You have several cards and find it hard to keep track of your spending and repayments
- You’ve signed up to another credit card which offers you a better deal
If you have little or no debt, having just one or two credit cards can improve your credit rating (provided that the reduction in your credit was down to you, not your bank!).
If you have collected as many as seven or eight cards over the years lenders may see you as having more potential to get in to debt as you’ve got more credit at your finger tips. Fewer cards means less temptation and more chance you’ll repay any money you borrow.
What’s more, the best credit card deals by far are reserved for those who have ‘new customer’ status. Most credit card companies see you as a ‘new customer’ if you’ve not had a credit card with them for 18 months or more – although this may vary between companies.
When shouldn’t you cancel?
Although it might be tempting to clear out your wallet or purse by getting rid of all your old plastic, cancelling several cards within a short space of time might give lenders the wrong impression of your finances and harm your credit record.
In particular, you probably shouldn’t cancel a card if:
You’ve held the account for a long time with no missed payments. If you have been borrowing with your credit card and you’ve got no black marks, it can have a positive impact on your credit rating – – so it’s normally best not to cancel these.
You’ve missed a payment on your credit card during the last three years. Wait until your missed payment has been dropped from your credit report before cancelling. Otherwise if you cancel your card with a missed payment still on your record, it could remain on your credit record for up to six years.
You have debts amounting to more than a third of your available credit. Lenders consider the balance (and debt) in your accounts against your total available credit. If you have debts, try and keep them below 30% of your available credit if you can.
So, if you have a line of credit with no debt – and you close that line of credit – then that line is no longer factored into your debt vs credit ratio.
So your debt as a percentage of your available credit will increase, harming your credit score.
However, if after reading the above you’re confident that cancelling a card won’t affect your credit rating, follow the steps below to secure your freedom from credit card hell!
How to cancel
Pay off your balance
This should be your first priority – especially if your card comes lumbered with a high rate of interest. Once you’ve cleared the outstanding balance on your card, you should then…
Phone your credit card provider
Inform them that you’ve cleared the balance of your card and that you wish to close the account. Be prepared for them to try and talk you out of it. There’s no harm in seeing what they’ve got to say – they may even offer you a better deal or a lower rate of interest. But be cynical if they try to keep your custom with vague promises of benefits that will be “brought in soon” but can’t offer exact details on the nature of the benefit or the date it will be brought in.
If they can’t offer you a substantially better deal, stand your ground and cancel the account.
Ask to be sent written confirmation of the cancellation of the account. Also get the address of the relevant section or person in the company in charge of the administration of credit card accounts – just in case anything goes wrong.
Write to the company
Send a brief letter or e-mail to the credit card company confirming that you are closing your account with them. Include your account number in the correspondence. State that you want it reported on your credit record that it was you – not the company – that closed the account.
Check your credit rating
It’s definitely worth checking that your credit rating hasn’t been damaged by the closure of the account. This could happen if your credit company is careless with their records and puts down your account as being closed by them rather than you.
However, it can take up to 30 days for a company to close your credit account, so wait at least this long before checking.
If your credit rating has suffered, you can take steps to fix it – either by contacting the bank directly or issuing a Notice of Correction. This is a brief statement you can put on your credit record that puts into context any missed payments or information that could prejudice a lender against you.
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