haha

Today’s “Ask the Reader” question comes from Sherry.  She writes:

How does one go about canceling unwanted credit cards?  You know, those credit cards you get so you can get a 10% discount on your 1st purchase…I think I have a 2″ stack of unwanted, unused credit cards.

We recently refinanced our house and superior credit (no reason to worry about our credit) and no debt…so how do I get rid of these cards?

Sherry, closing credit cards can be a little bit tricky in that it does affect your credit score, but probably not enough to be greatly concerned. Your FICO score is calculated by a number of factors, and two of them related to your question are credit utilization ratios, and the average age of your credit history.

Your credit utilization takes into account the amount of debt you have outstanding against your total credit limits.  For instance, if you owed $3,000 on a $10,000 credit card, your credit utilization would be 30%.  It is generally accepted that you should aim to keep your utilization ratio below 30% to improve your scores.  By closing accounts you are eliminating the $10,000 credit line from that formula, and instantly increasing your credit utilization.

In your case, it’s a moot point.  You are debt free.  Having a number of open trade lines may actually be detrimental in your case as lenders may see the cards as an opportunity to accumulate future debt.  Another risk is the more open accounts you have floating around, the higher the chances of falling victim to identify theft.

The length of time your credit accounts have been on file also affects your credit score.  Closing accounts you have had in place for several years effectively lowers the average age of your credit history, and may negative affect your score.  I wouldn’t let this deter you from closing out the unwanted credit cards, because the effects on your credit will be minimal.  I suspect you’ve accumulated the cards over a number of months or years, so closing them all will likely have little net effect on credit scores.

As for the mechanics of closing out these cards, the best way to do it is in writing.  I typically call customer service and advise that I would like to close the account.  Some places will try to negotiate, or talk to you like you’re an idiot for not wanting their card.  Stay cool – be adamant that you would like the account closed, and then follow up with the same request via letter to make sure it is in fact closed.

In order to keep your credit cards to a minimum you should only apply to the best credit card offers. Some of the bigger banks offer some pretty good rewards cards that you might want to have for your daily purchases. However, if you’re looking at savings accounts, then an internet bank is usually your best bet to find good savings account rates for your cash.

Do you have any tips to add for Sherry?

Comments

  1. I agree, get those puppies closed!

    Only thing to add is in a month or two, pull your free report and check to make sure that they are closed and being reported correctly. If they aren’t call them back and send another letter, until they are.

    Also, your situation seems like it might be a prime candidate for placing a “freeze” on your credit reports. Depending on your state, this could be a cost-effective way of helping prevent identity theft, since your need for credit is minimal.

    Good luck!

  2. I’ve been debating closing a few cards for a while but have decided against it because we may buy a place soon and I don’t want it to affect my credit score. But these cards are, at the most, a year or two old.

    The card I actually use is around 8 or 9 years old so I don’t think it’ll affect me.

    Should I close a couple of cards even if I might be getting a mortgage later in the year?

  3. @Writer’s Coin: Assuming you keep the older card open, and close out the newer cards, you aren’t likely to be greatly affected. However, if your score is good, you might be safer just to leave everything as is until you close on the mortgage. Then you can close out the unused cards and not worry about a potential dip in FICO causing problems at the wrong time.

  4. I closed 5 credit cards, inclduing my oldest credit card with a $49,000 credit limit, for a total of $72,000. One month later I refinanced my house, and had absolutely no problem getting the best interest rate at the time. Why? Because 0 divided by $1,000 is the same as 0 divided by $72,000. With 0 credit card debt, does it really matter how much “available credit” you have? It didn’t to the bank I refinanced with.

    I even talked to the loan officer to make sure that if I wasn’t getting the best rate I’d explain that my FICO score may have dropped due to the closing of accounts, but my score was still plenty high to get the best rate available, despite closing several credit cards.

    There is BENEFIT in closing an account – it helps simplify your life. It takes away a temptation of spending money you don’t have. It takes you one step further away from “playing with snakes.”

    I know my situation isn’t going to be the same as everyone elses, but I’m providing one piece of evidence that it IS possible to close a bunch of your credit cards and still get great interest rates for mortgages.

    If for some reason the bank sees your FICO score lower due to closing CC accounts, just talk to the loan officer about it. If they won’t get you the best rate, check out different banks. If you are truly credit-worthy, you’ll find a financial institution that will lend you the money for a mortgage.

  5. And to answer Sherry’s original question. I used my free credit report to gather all the phone numbers of my open credit cards. Called them up, and asked them to close my account and that they send me a letter indicating that the account had been closed. (most of them actually asked me if I wanted a letter)

    Only one of them acted like I was a total idiot for closing the card. But he works for a credit card company, what should I expect?

    Don’t be intimidated by them. And if you aren’t going to borrow any more anyway, close them.

  6. I would cut the cards up and then go to https://www.annualcreditreport.com/ (don’t go to one of the others that charges or spams you) and make sure you tell the 3 reporting agencies that those lines have been canceled (in writing), after you’ve called or written the store who gave you the cards you’ve destroyed that you want to close the account.

  7. @Jason Lancaster: Where did I say that “credit utilization is a low part of a FICO score?” I might have made reference to it not being a big deal for Sherry since she has no debt (and therefore her utilization is 0%, regardless of home many lines she has open).

    #2: I used to work in the credit industry, and I’m telling you some lenders see several open trade lines as a potential problem. As you said, it doesn’t necessarily make sense, but when did things have to make sense to be banking policy?

    I probably should have made this more clear in my response, but by over-arching advice to Sherry was not to give her FICO score too much concern. In her situation, she is doing great, and if she wants to close out the unused store cards she used to grab a one-time discount, I say why not. Like GFish says above, there is the definite benefit of simplifying your life.

  8. Hey….it’s SHERRY!!! WOW, I feel like I just saw my name up in lights! Wooohoooo!!

    Thank you so much for addressing this concern; it has been weighing heavy on my mind. I’m just one of those folks that does not like “unfinished” business & I see old credit cards that way…if I’m not using them & not receiving a monthly statement, I’m concerned that someone could potentially use an old card & I would never know it. Another reason to check my credit report frequently.

    These old cards are also reminders of days gone by when I really did not have the money to spend so I would charge a new, much “needed” outfit!! Oh, the rationalization.

    These cards are representative of a life I want to leave behind……

    I really, really appreciate the advice all of you have given me…I will keep you posted as I attempt to scourge my life the “evil” credit cards.

    ((hugs to all of you!))

  9. @ Jason – There are obvious benefits to closing a credit card.

    - Lower Risk Of Identity Theft
    - Prevent Erroneous Fees & COS (which can happen and are usually a hassle to clean up)
    - Makes it easier for the average person to review their credit reports for errors. (Also simplifies their overall financial picture making it easier to grasp)
    - Eliminate the ability to frivolously re-enter debt.
    - Prioritizes Emergency Funds
    - Uses less resources (paper, energy, man-power)

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