There's nothing quite as satisfying as paying off the last few dollars of a lingering credit card balance. But if your first inclination is to cut that debt-free card into a million pieces, think twice - cancelling a credit card isn't as straightforward as it seems.
Closing off your credit card isn’t an isolated act; it can have repercussions on your credit score says Patricia White, executive director of Credit Counselling Canada. “It can have a serious impact – I can’t really stress that enough,” she says.
“I think it’s a key piece people don’t understand about credit scores and credit reports, there’s still lots of misinformation and misunderstanding out there.”
She points out there are plenty of reasons for cancelling a credit card – maybe you’ve got a couple on the go and want to lighten your plastic load or perhaps you found one with a lower interest rate that's more in tune with your needs as a consumer.
Here are a few of the consequences that can come with cancelling your credit card.
Protect Your History
Credit cards are a bit like fossil records; they hold onto your history even after you stop using them.
“If it’s an older credit card you’ve had for 10 years or something, there’s a lot of history of you paying appropriately,” says White, adding that if you ditch the card, you ditch the history. “What people don’t realize is the positive history from that card that you’ve paid off stays in your report, it doesn’t just disappear.”
Move Your Points and Perks
If you're carrying a card tethered to a loyalty or reward program, make sure you use or rehome your rewards before moving on. If you're switching to a credit card offered by a different lender, those points generally can't make the trip with you.
If your card is a cash back product, you can usually have the lender send you your rewards in cheque form, or redeem them for merchandise. Keep in mind, some lenders only pay out cash back rewards on an annual basis, so ensure your card cancellation works with this timing.
However, leftover travel rewards can be trickier to deal with. One option is to have your credit card earnings converted directly into points within the card' partnership airline. Ensure you check with your credit card provider to confirm your options before cutting the cord.
Know Your Utilization Ratio
Your credit score is also impacted by something called a utilization ratio – the amount of your available credit that you’re using. You can calculate it easily by dividing your total credit card balances by your total credit card limits.
Lenders aren’t fans of high utilization rates – it hints at the notion that you may not be able to repay your debts.
“If you had three cards and your utilization is at 30 to 35% of the credit limit and you cancel or close one of those cards, that impacts your utilization on the other two,” says White.
Removing a card from the fold lowers your available credit and can prop up your utilization rate without you even knowing it, which can affect your credit rating.
Take Care of The Leftovers
You also want to make sure there’s no balance remaining on your card. “It seems logical but you need to check and see that there’s no residual interest there,” says White. “Just because you paid the statement in full doesn’t mean that’s everything.”
Her best advice is to call the credit company and double-check it’s been paid in full.
The Case Against Saying Goodbye
In Canada, your credit rating is the product of five factors – payment history, outstanding debt, credit account history, recent inquiries and types of credit. Credit scores range from 300 to 900, but the average Canadian hovers around 700. Drop lower than 620 and you might have a difficult time securing a loan.
With that in mind, this is the part where you have to take a step back and take a look at the bigger picture.
Sure, your credit card is paid off; sure, just having it in your wallet gets your spending hand itching. But wouldn’t it be better to tuck it away and pull it out once or twice a year just to show the credit card companies how responsible you are?
After all, having several debt instruments open – like credit cards – does just that, painting you as the sort of person they’re looking to lend to.
If you’re still not convinced and you want to be rid of it – you’ve checked there’s no outstanding points or payments on it, it’s not going to heavily impact your utilization ratio and the credit history on the card doesn’t really boost your profile one way or another – give the credit card company a call and say your goodbyes.
“I would make sure to follow up in writing,” says White. “And takes notes! You want to make sure you have some sort of record of the verbal transaction you had.”