Gails Blog

People are always writing to ask what the impact will be on their credit history if they cancel their cards or reduce their limits. I’m not surprised that people don’t know what to do because so much MISinformation is available. I was browsing around the web the other day and came up this advice:

If your credit card balance is zero, go ahead and close as many unused accounts as you want. As long as your credit cards are balance-free, it won’t hurt your credit score a bit. So call those card issuers and cut away.

DON’T. This advice is wrong. That’s the problem with looking for advice on the web; unless you get a S’mbody who knows what she’s talking about, you can do yourself more damage than good.

Here’s the problem with the advice: If the card you cancel has a long and lustrous credit history associated with it, as soon as you cancel the card, you lose the credit history. Ooops!

Okay, so you’ve had a bunch of cards in your wallet and you’re determined to trim your exposure to credit, here’s what you should do:

Look back over your credit card statements to see which ones are the oldest and have the healthiest credit histories – read “no missed or late payments”. You’re going to hang on to these to keep your history intact until you’ve built a sparkling credit history elsewhere.

Choose the two (at the most) cards that you want to keep. These cards should have lots of benefits: cash back, really low interest rates, whatever toots your horn.

If the card(s) you want to eliminate has a good history, start by reducing the limit on the card to reduce your credit exposure, but keep the card active. After six months, you should have built up a more solid history on your two newer cards, and can close the old card(s).

When you are reducing your credit limits, do NOT reduce your limit to the point where your balance is greater than 60% of your limit. So, if you have a current balance on the card of $1000, you’re limit should not be less than $1,700. Why? Cos part of the credit scoring system looks at how much of your limit you’ve used up. The more often you bump your head against your limit, the lower your score. That’s why paying off $50 and then immediately lowering your limit by $50 can do more harm than good.

When it comes to cancelling the card, first make sure you’ve redeemed all your rewards (cos they are HI-STO-RY) and also – very important — make sure there is a zero balance on the account. Lenders freak if you try to close an account with a balance, even if it’s because they just threw some interest on a card you thought you’d paid off in full. So before you cancel, call customer service and make sure the balance is zero.  Then:

Ask to cancel your card. If the sales rep promises you her first born to keep the card, stand your ground. Remember, you’ve already chosen the card (or two cards, AT MOST) that you’re going to keep.

Send written confirmation to the card issuer and keep a copy on file. Fax it if you can so you have a record of its receipt. Ask for written confirmation of the account being closed.

Once you receive confirmation that the card has been cancelled, wait about six weeks and then check your credit report. Remember, it’s your responsibility to verify that your credit report is accurate.

While it can be pretty dramatic (like on TV!) to simply cut up your cards, doing so does nothing to close the account. However, if you want to avoid the temptation to use a card you’re committed to cancelling, nothing beats a pair of sissors!

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