How to Cancel A Credit Card Without Hurting Your Credit Score

The decision to cancel a credit card may be based on the desire to avoid excessive spending or if the terms of the card, such as annual fees or a high interest rate, are no longer attractive.

While credit cards aren’t evil, they can be very dangerous. You need to be careful with the way you wield credit. If you’re not careful, you could do some real damage to your credit standing.

Be aware that cancelling a credit card may actually hurt your credit score. Part of your score is based on how much of your available credit you actually use; this is your credit utilization ratio. When you close a card, this ratio jumps because you’re using more of your valuable credit. And when this ratio jumps, your credit score goes down. (Also note that the longer you’ve had an account, the more you’ll affect your credit score by closing it.)

On the other hand, Too many open lines of credit can damage your account as well, which is why you should open new credit card accounts judiciously. Getting a 10% discount on your first purchase is probably no longer a good enough reason to open a new line of credit. Once you have at least one major credit card, you're not necessarily better off by opening a handful of store credit cards.

Cancelling a credit card is easy, but if you do it, do it right.

• Close just one account at a time, even if you’re closing several. First, cancel cards that charge you fees. Also, it’s better to cancel new cards before old ones. And you may want to keep cards with good rewards programs.
• Before you close an account, pay off your balance or transfer it elsewhere. If you try to cancel a card while it still has a balance on it, you might end up paying nasty fees and high interest rates.
• Contact your credit card company. You can cancel some accounts online, which is convenient because often when you try to cancel by phone, the sales rep will do his best to talk you into staying. If this happens, be firm.
• Send written confirmation. Follow up by writing a letter to the card issuer.
• Watch your credit report. It may take several weeks for changes to appear on your credit report. It’s your responsibility to be sure the report is accurate, so keep tabs on it. You may also want to watch your credit score to see if cancelling the card did any damage.
• When you’re certain the account is closed, cut up your card.

There are many compelling arguments for closing credit card accounts. Doing so keeps you from abusing credit, reduces the risk of identity theft, and makes bookkeeping easier. Whether these factors outweigh the potential damage to your credit score is a call only you can make. The important thing is manage finances responsibly.