What to Know Before You Cancel a Credit Card

There are many good reasons to cancel a credit card, like high annual fees or joint accounts you don't need anymore. However, if you're thinking about canceling a card just because it hasn't been used for a while, you should know there are some unintended consequences to that.

Impact on Your Credit Score

The main things that will be affected by canceling a credit card are below, but to learn more about what goes into your credit score, check out our article What is a FICO Score and Why is it Important.

• Credit Utilization: The algorithms used to create a credit score take into account how much of your available credit you're using, otherwise known as your credit utilization. Ideally, you want to stay below 30% credit utilization, and taking away available credit can increase your credit utilization rate, which means your credit score will be negatively impacted.
• Length of Credit History: If you've had your credit card for years, it might be better to keep it even if you plan on using it less. Your score is impacted by how long your accounts have been opened; the longer, the better.
• Available Credit Limit: This is tied into credit utilization and shows that you're responsible for the credit available to you. If you cancel a card with a substantial limit, it will lower the amount of credit available to you, which can lower your credit score.

Rewards Points and Benefits

Many credit cards offer various features and benefits, like cash back or airline miles. Double check the offers available to you on the credit card and any outstanding cash back or points available to you and redeem them if you can before you cancel. Reading through the card agreement and other documents will probably tell you that you forfeit any unredeemed cash back or points when you cancel.

Fees and Balances

If you decide to close your card, make sure it's at a zero balance for at least one billing cycle before moving forward. This way, you can ensure any charges that were not included on your last statement are paid in full. This way, you'll avoid any headaches associated with unpaid interest and related fees.

Impact on Future Financial Plans

If you're in the middle of buying a home, for example, canceling a credit card can impact the process and have unintended negative consequences. Canceling a card can also impact your ability to qualify for a loan in the future because it impacts your credit score in different ways and can bring your score down. If you do qualify, even if you cancel the card, you might get a higher interest rate than you would have if you kept the card because your score might have been higher by keeping it.

Alternative Solutions

If you want to cancel your credit card because it has an annual fee (and you aren't using the associated rewards and benefits), call the issuer and ask if you can downgrade your card to another one that doesn't have a fee or has better terms. This way, you can keep the credit history associated with your card, avoid potential negative consequences, and get a low or no fee.

Reasons to Cancel Your Credit Card

Sometimes, it just makes sense to cancel. This can be anything from a relationship ending with someone you hold a joint credit card with to removing the temptation to spend so you can focus on paying off your debt. These reasons can be many and are personal, and at the end of the day, if you do decide to cancel, it won't be the end of the world. Just be sure you're informed of what can happen as a result and plan for that if you can.

WaFd Bank is Here to Help

No question is too small for our friendly bankers, and we're here for you! If you're in the market for a credit card, WaFd Bank offers a cash back option, plus checking accounts and savings accounts that come with everything you need and more, plus the digital tools and services necessary to manage your money how you want to. Tools like Voice-Activated Banking come with your accounts, so you can quickly get your balance, make transfers between your WaFd accounts, and more while you're on the go. Stop by your local branch, open an account online, or give us a call at 800-324-9375 to learn more.