Despite what many people think, closing a credit card ahead of applying for a mortgage or refi will not make you look better in the eyes of a lender. We have covered the tricky relationship between debt usage, credit scores, and mortgage evaluations before. We also talked about the credit score that really matters to lenders. Suffice it to say that trying to raise your credit score is NOT one of the good reasons to close a credit card.
That said, there are a few good reasons to close a credit card, such as:
- You may consider closing a credit card because you don't charge on it anymore and it has a high annual fee.
- You opened the card for perks that made the fee worthwhile, like rental car insurance and airline upgrades, but over the years the perks have dwindled or your lifestyle has changed.
- It's getting harder for you to justify paying the fee every year now that you have other cards with similar advantages.
- Or maybe it was a joint account, and now you're getting a divorce.
If any of those good reasons apply to you, take these four steps to close a credit card the right way.
Tip: You could pay off an unwanted credit card by redirecting the money you save with a mortgage refinance. View your best lender matches today.
1️⃣ Pay Down All Other Balances First
Get all your account balances low first. Get them to $0 if you can, so you can stop paying interest entirely. Having low balances across all your cards lessens the impact that closing one account will have on your ratio of debt to available credit, which is called your debt utilization. That ratio constitutes about 30% of your FICO score.
Debt utilization formula: Here's an example of the ratio in action. Let's say you have $9,000 in total available credit across three accounts. One card balance is $0, while the other cards have balances of $1,200 and $1,400.
Total debt ÷ total available credit = debt utilization
($0 + $1,200 + $1,400) ÷ $9,000 = 29%
A ratio of 29% is good. Financial advisors recommend keeping your ratio under 30%.
Closing an account will shrink your available credit. Say the limit on the empty card is $3,000. If you close it, you drop your available credit from $9,000 to $6,000. Your debt utilization climbs to 43%.
($1,200 + $1,400) ÷ $6,000 = 43%
Before closing any account, you should pay down all the balances. This way, after you close the account, your debt utilization ratio will remain strong because although you shrank your available credit you also shrank your debt.
To continue with the above example, once you have paid down the balances to $1,800 in total, you can close the unused account and still be at 30% debt utilization.
$1,800 ÷ $6,000 = 30%
2️⃣ Redeem Any Perks the Card Still Owes You
You might have rewards waiting on the card, like ride-hailing app credits or airline miles. You earned them, so strive to use them before you close the account.
A convenient alternative to having to use up points/miles on the card before you close it is transferring the perks to an affiliate program and using them later. "Some credit cards add the option to transfer points or miles to airlines, hotels, and other travel partners affiliated with your issuer," explains Hanneh Bareham at MSN. "Whether you gain, lose, or break even on value depends on the program, but ideally, the ratio would be 1:1 or greater. It's important that you really dig into the program details when you transfer rewards to travel partners so you can get the most value possible."
3️⃣ Call the Credit Card Company to Cancel, and Ask for Written Confirmation
Your call might be transferred once or twice, but eventually you will get connected to someone who can verify that your balance is $0 and then close the account. Ask for written proof that the account is closed (not hibernated, not suspended, but closed). As proof, don't accept an email that only confirms some vague action like, "It has been a pleasure handling your request today." You want to see the word closed in writing.
4️⃣ Check Your Credit Reports Over the Next 4-6 Weeks
Request free copies of each of your credit reports from the three main reporting bureaus: Equifax, Experian, TransUnion. Make sure the old credit card account is shown as closed by the cardholder (you), not that it has a balance of $0. Only an open account can have a balance. Your credit reports should say, "Closed by cardholder."
The only place for a truly free credit report: Order your free credit reports on the government-backed site annualcreditreport.com, the only site authorized by the FTC to give you free credit reports. Follow that link only; if you try searching the web for free credit reports, you will get a bunch of credit-monitoring sales pitches disguised as free reports.
So if you have a good reason to close a credit card, follow those four steps to do it right. Don't expect the closure to raise your credit score immediately, but when you are in a responsible financial position to close a credit card, you are well on your way to raising your score anyway, the slow and steady way. We go into more detail about credit card debt and credit scores here.
Remember, you could pay off an unwanted credit card by redirecting the money you save from a mortgage refinance.
Finally, don't expect that closing a credit card will erase any bad history on it. The history sticks with you as part of your credit profile. But the good news is that your responsible use of that card over the years also stays in your profile.