Thinking of ditching your credit card? 4 consequences to consider
October 01, 2010
In our debt-laden society, the notion of cutting up credit cards is often portrayed as an ultimate act of financial responsibility. However, there's more to consider in closing an account than the symbolic shredding of indebtedness.
Consider these four points before you close an account:
1. Upcoming credit card fee or rate hike: You have the right to cancel.
Under the Credit CARD Act of 2009, credit card issuers must give you 45 days' notice before changing the terms on your account, including hiking fees, the fixed interest rate or the margin they charge on a variable rate. The new rules also give you the right to cancel the card before the new charges take effect, so read notices from your credit card companies carefully. A letter that might look like junk mail from your issuer could be a notice of an upcoming change.
2. Your credit card minimum payment could go up.
The credit card company can't make you pay off the balance all at once if it proposes a rate or fee hike that prompts you to cancel. Instead the issuer must do one of three things:
- Let you pay off the balance under the existing monthly minimum payment structure.
- Give you at least five years to pay off the balance.
- Increase your monthly minimum payment by doubling the current level. (Monthly minimum payments are set at a small percentage of your balance, usually 2 percent to 4 percent.)
A little financial breathing room is a good thing, but try to pay off the balance as soon as possible. The sooner you eliminate the debt, the less interest you pay.
3. It takes more to cancel a credit card than a pair of scissors.
Simply cutting up the credit card doesn't cancel the account. Call your credit card company, follow up with a letter to cancel the account and get written confirmation that the account is indeed closed.
4. Consider how canceling a credit card will impact your credit score.
Fewer credit cards will reduce the amount of available credit you have and therefore boost the percentage of credit you use if your spending stays the same. Your credit use ratio is a big factor in your credit score. Experts advise keeping the ratio below 30 percent of your credit limits. If all things are equal and you're deciding between closing one or another account, choose the newest account to cancel. Lenders like to see long credit histories, so a long-held account is better for your credit rating than a newer account.
Sometimes canceling credit cards is the best way to beat bad spending habits, and having too many accounts can hurt your credit score as well. But if you're closing a credit card simply because the terms are going sour, shop online for the best credit card rates and compare offers side by side to find a replacement.