Cutting up a credit card only takes a few seconds. However, deciding when it’s time to cancel one of your card accounts should be a more thoughtful process. Before you decide to cancel a credit card, here is everything you should consider before making the decision.
It’s always important to take a minute and periodically evaluate your financial situation. As circumstances around us change, so do our goals and needs. Being a points enthusiast, these changes can sometimes affect which credit cards we carry in our wallet.
Generally, I recommend keeping your credit card accounts open when possible. Especially if the card doesn’t carry an annual fee. In that case, you’re almost always better off just sticking it in your sock drawer and just making a purchase or two each year to keep the account active. However, if you still feel you need to close the account, please consider the following before you do.
Should I Cancel A Credit Card
Being Responsible – There are some circumstances the necessitate closing the account regardless of any other consideration. One of our credit card ground rules for participating in the points and miles hobby is that you pay off your credit card balance IN FULL every month. If you’ve found that this has become an issue for you, then YES, close your account and pay your balance as quickly as possible.
Has It Been A Year – I would never recommend closing a credit card before having it for at least 1 year. This is especially true if you received a welcome bonus for opening the account. Card issuers don’t like it when you open an account, earn the bonus and then close it.
They’re trying to create mutually beneficial relationships with consumers, so this can affect your ability to open a new account in the future. In fact, American Express explicitly states that if you “abuse” or “game” the welcome offer, they will take back the bonus points. Besides, it’s difficult to know if a card is right for you if you only have it for a short time.
Evaluate The Card’s Benefits
Typically the reason you begin to question if you should cancel a credit card is when the annual fee is charged to your account. Most cards that charge an annual fee will give you various benefits for being a cardmember. In my opinion, if you can get more value from a card than what they charge as an annual fee, keep it. Here are a couple of examples.
Free Nights – Most hotel co-branded credit cards, like the World of Hyatt card, give you a free night after each anniversary year. Although the card charges a $95 annual fee, a free night is easily worth more than the fee. Especially when you consider you don’t pay room tax on an award night and Hyatt doesn’t charge resort fees on redemptions.
Bonus Categories – A lot of cards give you bonus points for spending in specific categories. The American Express Gold Card gives you a whopping 4x Membership Rewards points at US grocery stores (on the first $25,000 spent each year) and restaurants worldwide. AMEX values their points at 1 cent per point.
If you were to spend $10,000 in these categories each year, the points you would earn are worth at least $400 (10,000 x .01 x 4), which is more than the $250 annual fee, see rates and fees. And that’s before consider the statement credits that come with this card.
Statement Credits – Cards like the Chase Sapphire Reserve® come with statement credits each year. Yes, the card comes with a hefty $550 annual fee but it also has an annual $300 credit towards travel purchases. The travel credits are extremely easy to use so it makes getting a lot of value from the card with the other benefits simple to do.
The next step in the processing should be to contact your credit card company to see if they have any retention offers for you. Credit card companies don’t like to lose good customers, so frequently they’ll offer you an incentive to stay with them by offering you an incentive.
Retention offers can take on several forms. Some of the most common offers are offering to waive the annual fee or giving you a statement credit or bonus points if you spend a specified amount in a specified period of time. I have received all three of these types of offers. Sometimes the offers were worth keeping the card for another year and sometimes it still didn’t make sense for me.
To find out if you’re eligible for an offer, contact the bank’s customer service by phone or secured message in your online account. Be honest with them. Tell them you’re thinking of closing your account and wanted to see if you were eligible for a retention offer. The worst thing that can happen is they say “no”.
Credit Score Considerations
Closing a credit card can have a negative impact on your credit score. The way companies calculate your score is confidential, so it’s hard to know just how much it will impact you. However, here are the two reasons why it will.
Average Length of Credit – One factor of your credit score is the average length of all of your credit accounts. The longer your accounts are open, the higher the average age of your accounts is. Companies that extend credit like to see a longer average age of your accounts. If you cancel one of your credit card accounts, this will low your average and decrease your score.
Credit Utilization – This calculation shows how much of the credit you use based on what you’ve been given. In this case, the lower the utilization, the better. For example, let’s assume you have 3 credit cards and each card gives you a credit limit of $10,000. If you spend $3,000 per month combined each month on your credit cards your utilization rate is 10% ($3,000 / $30,000 = 10%). If you decide to cancel on of your credit cards, your utilization rate will immediately increases to 15% ($3,000 / $20,000 = 15%).
This is where I will generally recommend leaving your account open if the card doesn’t have an annual fee. If there’s no annual fee, it won’t cost you anything to keep it in your sock drawer. This way it will help both your average length of accounts and your utilization rate. Just remember to take it out once or twice a year and make a small purchase with it. This will keep your account active so the bank doesn’t close it thinking you don’t need it any more.
Protect Your Points
After all of these considerations, if you still decide you want to cancel your credit card be sure to protect the points you’ve already earned. This isn’t a problem if you’re closing a co-branded airline or hotel credit card. Those points are automatically deposited into your loyalty accounts each month.
You won’t lose these when you close your account but they are subject to the respective program’s expiration policy. The points for some programs never expire but others do. Make sure you understand how to keep your points active so you don’t lose them.
Cards that earn points with the bank’s own program are at risk of disappearing once you close your account. These programs include but are not limited to, Chase Ultimate Rewards, American Express Membership Rewards, Capital One Venture Miles and Citi ThankYou points. If you have a card like the Chase Sapphire Preferred® Card, AMEX Gold or the Capital One Venture Rewards card, have a plan in place before cancelling your card.
Each program is a little different. Some will let you transfer your points to another card, while others will let you keep them if you have another card that earns those points. If neither of these is an option, there are other options to redeem your points. You can transfer them to a partner program, redeem them for gift cards, cash or statement credits. Regardless, just make sure you redeem them prior to cancelling your account so you don’t lose any.
Before you cancel a credit card, spend a few minutes going through each of these steps. There are many times it makes sense to close your account. However, I think you’ll be surprised how often it’ll be more beneficial to leave the account open. No matter what you decide, following these steps can help you avoid a costly mistake.