Keeping credit card accounts open can boost your credit score, but there are some situations where closing a credit card is the better move.
If you’re struggling to pay annual fees or interest rates, regularly overspending, or have too many open cards it may make sense to close the card.
When closing a card, removing it from your wallet or cutting it up isn’t enough, and you might get stung with fees or a ruined credit score if you don’t close your card correctly.
To help you navigate the process, we’ve broken down closing a credit card into seven easy steps.
1. Consider How Closing It Will Impact Your Score
According to TransUnion, three things affect your credit report when you close a credit card: average credit age, credit utilization ratio and credit mix.
- Lowers credit age: The older your credit is (if it’s good), the higher your score will be. If you’ve had a credit account for a long time, closing it could hurt your score. You should try not to close your oldest account since it could severely impact the average age of your credit.
- Raises credit utilization ratio: When you close a credit account, the total amount of your available credit decreases.
- Reduces your credit mix: Lenders look to see if you can handle different kinds of debt, such as credit cards, auto loans, student loans and mortgages. If you close your only credit card, your credit mix is less diverse—lowering your credit score.
What Information Stays on Your Account After You Close a Card?
Closing a credit card doesn’t forgive or delete the payment history associated with it. Any negative marks, such as debt settlement, can stay on your report for seven years. Positive information stays on your report for up to 10 years.
If you have negative marks on your credit account, try to bring your account to good standing before closing it. For example, pay off the balance on the credit card with a lump sum or timely monthly payments.
2. Use Up Your Credit Card Rewards
When planning to cancel a credit card account, check the balance of your points and rewards. You might be able to keep points issued by an airline or hotel after a card is closed, but not always.
You won’t be able to keep the points issued by the credit card company after you close your card. If you need to, check whether you can transfer rewards and points to a friend or spouse’s card, or to an alternative card you have with the same bank.
If you have unused rewards, you’ll want to cash out your points as a check, book a flight or redeem your rewards in another way so you don’t lose the value.
You may need to accept losing some rewards if you haven’t met certain requirements, such as spending a set amount of money.
3. Update Any Automatic Payments on the Card
If you’ve set up automatic payments linked to your credit card, such as your utilities, make sure you switch the payment method.
If you don’t switch automatic payments, you could be charged a fee when the merchant tries to process a payment.
4. Pay Off Your Credit Card Balance
Closing a credit card when you have debt affects your credit utilization and can damage your credit score. When you close a credit card, your credit utilization rate increases because you have less available credit in comparison to the amount of debt you have.
You can open another card as a replacement, giving yourself more available credit. Having other cards open can keep your utilization ratio low and show lenders you’re not a credit risk.
Keep in mind that even if you close a card, you need to pay off the balance. It’s best to do this before closing the account. You could also transfer the balance onto another credit card while the card is still open.
When you’re ready to pay the balance off, double-check to make sure you know the full “payoff” amount. This amount includes recent purchases, interest since your last bill, plus any fees. Remember, your credit card won’t be closed completely until you pay off the full balance.
5. Contact Your Credit Card Issuer’s Customer Service
To officially close the credit card, you’ll need to call the credit card company or log in to your online account. Confirm that your balance is zero and tell them that you’d like to close your account.
Be aware that a customer service representative might try to persuade you to keep the card open—offering you perks or a lower interest rate. Stick to your decision and remind them politely that you wish to cancel the card. Make sure you write down the day and time you called and the name of the person you spoke to.
6. Follow Up in Writing
Canceling by phone or email is usually sufficient, but sending a letter is proof that you asked for the account to be closed. Your letter should include the following:
- Credit card number
- Note that you requested for the account to be closed
- Date and time you made the request
- Documentation that you paid off your account balance
Make sure to keep a copy of the letter for your records.
7. Confirm the Account Was Closed
Even after closure, it’s possible that some payments or interest haven’t been charged to your card yet. To be certain there’s nothing outstanding, watch for your final statement. Be sure it shows that your balance is paid in full.
Your account should also show as closed on your credit report. If it isn’t showing up as closed after two or three months, get in touch with your credit card company.
Once you’ve confirmed everything is closed and paid, you can finally dispose of your card. Make sure to destroy the magnetic strip and chip. The most effective way is to use a shredder.
What to Do if Your Closed Card is Still On Your Report
It’s possible that a credit card account can remain open on your credit report by mistake. If this happens, contact the credit bureau and request the information be changed. You should also inform the credit card issuer—they’ll be obliged to contact all three credit bureaus with the correct information.
Learning how to close a credit card the right way can help you avoid costly mistakes. Even a single error can cause long-term damage to your credit history. Ensure you have an accurate report by reviewing your free reports or getting help Lexington Law Firm. Contact one of our credit consultants today to learn more about our credit repair services.
Does Getting Joint Credit Cards Have an Impact on Both Spouses’ Credit?
While marriage can help you improve your financial situation, it does not automatically mean that you and your spouse will share a credit report. Your credit records will remain separate, and any joint accounts or joint loans that you open will appear on both of your reports. While this can be advantageous, it’s critical to remember that joint account activity can effect both of your credit scores positively or negatively, just as separate accounts do.
Users Who Are Authorized
An authorized user is a user who has been added to an existing credit account and has been granted the authority to make purchases. Authorized users are typically issued a card bearing their name, and any purchases made by them will appear on your statement. The primary distinction between an authorized user and a shared account owner is that the account’s original owner is solely responsible for debt repayment. Authorized users, on the other hand, can always opt-out of their authorized status, although the principal joint account owner cannot.
If your credit score is better than your spouse’s as an authorized user, he or she may benefit from a credit score raise upon account addition. This is contingent upon your creditor notifying the credit bureaus of permitted user activity. If your lender does report authorized users, the activity on your account may have an effect on both you and your spouse. However, some lenders report only positive authorized user information, which means that late payment or poor usage may not have a negative effect on someone else’s credit. Consult your lender to determine how authorized users on your account are treated.
Joint Credit Cards Have an Impact on Your Credit Score
Opening a joint credit account or obtaining joint financing binds both of you legally to the debt’s repayment. This is critical to remember if you divorce or separate and your spouse refuses to make payments, even if previously agreed upon. It makes no difference who is “responsible,” the shared duty will result in both partners’ credit histories being badly impacted by late payments. Regardless of changes in relationship status or divorce order, the creditor considers both parties to be liable for the debt until the account is paid in full.
Whether you’re happily married or divorced, you and your spouse may decide to open separate credit accounts. Most creditors will enable you to transfer an account that was previously joint to one of your names if both of you agree. However, if there is a debt on the account, your lender may refuse to remove your spouse’s name unless you can qualify for the same credit on your own. Depending on your financial status, qualifying for financing and credit on a single income may be tough.
While creating the majority of your accounts jointly with your spouse may make it easier to obtain financing (two salaries are preferable to one), reestablishing credit independently following a divorce or separation is not always straightforward. To make matters worse, your spouse may wind up causing significant damage to your credit rating following the separation, either intentionally or through irresponsibility – making the financial situation much more difficult.
Before you rush in and open accounts with your spouse, take some time to discuss the shared responsibility of these accounts and what you and your husband would do in the event of a worst-case situation. These types of financial discussions can be difficult, especially when you rely on items lasting a long time, but a mutual understanding and respect for each other’s credit can go a long way toward keeping your score when sharing an account.
Should you pay down debt or save for retirement?
While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.
Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.
If you have high-interest debt, pay it down
When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).
In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.
High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.
To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.
If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.
Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.
If you’re nearing retirement, start to save
The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).
Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.
Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.
Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.
Aim for both goals by improving income
As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.
The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.
If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.
For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.
While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).
How does a loan default affect my credit?
Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.
Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.
30 days late
Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.
The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.
More than 30 days late
Payments that are more than 30 days past due can trigger increasingly serious consequences:
- The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
- You may receive phone calls and letters from creditors demanding payment.
- If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.
Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.
Other ways a default can hurt you
Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:
- If you default on a car loan, the creditor can repossess your car.
- If you default on a mortgage, you could be forced to foreclose on your home.
- In some cases, you could be sued for payment and have a court judgment entered against you.
- You could face bankruptcy.
Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.
How to avoid a loan default
Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:
- For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
- For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.
Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.
Clean up your credit
The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.
Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.
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