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If you own a credit card you no longer use, you may consider cancelling that card.

The reasons for cancelling a card can vary, but your issuer might have:

  • Raised the annual percentage rate (APR). Rather than cancelling, try not to carry a balance. If you do, pay off that card as soon as you can, or consider transferring your debt to a balance transfer card with a 0% or low-interest promotional period.
  • Changed the rewards programme or raised the annual fee. If your card’s annual fee goes up, and you don’t think the rewards are worth the extra money, then cancelling might be a good idea.
  • Threatened to cancel a card you no longer use. Issuers may target your inactive account. If you don’t want them to try and close your card, make some small payments every so often and pay off that balance immediately.

If you’re intent on closing your card, you should be aware that it might damage your credit rating. Before you make a decision, take these three steps to ensure your decision is a well-informed one.

1. Review your credit history

Look at how long you’ve held each of your cards. You can do this by getting a free credit report. If the card you want to close is one you’ve held for years, you may want to reconsider.

Why? When computing your credit score, the three major credit reporting agencies take into account the length of time you’ve had a credit file open.

If your credit score is excellent, closing one card may not have a big effect on your standing. But if you have a less-than-stellar credit rating, cancelling a long-held card will reduce the average age of your accounts, which in turn can negatively affect your score.

2. Look at your available credit

Closing a credit card also will impact the percentage of available credit you have access to. This is known as your credit utilisation ratio, and it’s another contributing factor that goes into computing your score. Generally speaking, the more credit you have access to and the less you use it, the better it is for your score.

If you own two credit cards, each with a £5,000 limit, and carry a balance of £2,500 on one, you’re using 25% of your total available credit. But, close one of those cards and now that balance uses up 50% of your available credit.

Anytime you close a card, it will lower your total available credit, which could affect your score. How much will depend on how many other cards you have and how much total debt you’re carrying on those cards.

3. Look at the big picture

If the card has a hefty annual fee, or if you’re a hard core credit card maximiser who churns and burns through cards and their sign-up bonuses, then it may be worth it to consider cancelling, but look first at your overall credit profile to see how it may affect your score.

If you find that you have more cards than you can handle, or you just want to simplify things, you may be better off putting that unwanted card in a drawer and forgetting about it. And, that card’s credit limit also will help factor into your credit utilisation ratio, so even if you aren’t using it, the line of credit you were granted with that card can still help you.

Keep in mind that even an account that was in good standing when it was closed can remain on your credit report for up to 10 years.

Now read about how to switch to a new credit card

How to cancel a credit card

This is how you cancel a credit card:

  • Pay off the balance: You can’t cancel a credit card unless you pay it off first. If you don’t have the funds to pay it off right now, you can ask the card issuer to freeze the card until you can clear it.
  • Contact the issuer: Call the number on the back of your card, confirm that your balance is zero and then ask to cancel the account.
  • Follow up with a letter: Though it usually isn’t necessary, you can also send a letter to say to the issuer that you’re closing your account and you want your credit record to reflect that you’ve requested the account be closed.

Most people don’t keep every card they’ve ever opened. So, here are a few recommendations for those times when you must dump a card:

  • Spread out closures over time so that your credit utilisation doesn’t spike
  • Keep your oldest account open to preserve credit history length
  • Keep cards with high limits open
  • Don’t close credit card accounts right before applying for a loan

Also, scores reflect current monthly balances, so if you can pare down debt on other cards after closing an account, your score can make a speedy recovery.

Now read about how to use a credit card correctly – or how to improve your credit score