After security officers dragged a passenger from a United Airlines plane last month, the internet was abuzz with accounts of customers cutting up their United credit cards and vowing never to fly the airline again.
Many of those customers seemed to find satisfaction in poking the company in the eye. But were they shooting themselves in the foot at the same time? What’s the best way to rid yourself of a credit card you don’t want?
Experts say simply destroying a card and leaving it at that can come back to haunt the customer with problems ranging from lost rewards points to credit damage. They recommend a less impulsive course.
“The biggest risk is that you won’t be able to replace the card should you need to increase your credit later, or that you won’t be eligible for a card that’s as good as the one you’re canceling,” says Julia Kagan, personal finance editor at Investopedia. “This is especially true if your income is lower than it used to be or if you’ve been through a period of financial problems, even if they’re over now.”
Throwing a card into the trash without actually canceling the account also invites mistakes like missing the next annual fee payment, says Liz Weston, credit expert at NerdWallet, a personal finance site.
“If you forget to pay that annual fee, you can trash your credit,” Weston says. “One missed payment can knock more than 100 points off good credit scores, and it may take up to three years for your scores to recover.”
Canceling a card reduces the total amount of credit you have available, increasing the percentage of the limit used by any balance you carry, which can hurt your credit rating, says Matthew Goldman, founder of Wallaby, an app that helps consumers maximize credit card rewards.
On the other hand having too much credit available can also hurt your rating, because it increases your opportunity for borrowing too much.
The first issue, of course, is why you want to get rid of the card. If it’s to express displeasure, simply trashing the card may not send the message, as the issuer won’t know why you’ve stopped using the card. It’s like organizing a protest rally in the middle of nowhere in the middle of the night, with you as the only one marching.
Writing a letter explaining your move would ram the point home – and if enough customers do it the firm might change the practices you don’t like, benefiting other customers if not you.
Explaining your reasons makes sense, also, if you have practical consideration like having found a better card.
If the idea is to cut back on temptation or confusion, experts recommend sorting all your cards and dispensing with those that have the highest interest rates or most unforgiving penalties, or which you simply don’t use very often. Accounts opened to get a deal from a retailer you rarely patronize are good candidates for closure.
A card with a high annual fee is a good candidate for disposal, unless you carry a large balance and the fee gets you a low interest rate. It may be possible to switch to a low- or no-fee card from the same issuer, Goldman says.
It may pay to keep a card you’ve had a long time even if you don’t use it much, Goldman says, because a good payment record over a long period is good for your credit rating.
“If you want to reduce your annual fees, call the bank and ask for a product change or a fee waiver for a year,” Goldman says. “If you pay on time; you’re likely to get the waiver and there are few circumstances where a downgrade to a fee-free card will be denied. This will allow you to maintain the history of credit and the credit line.”
“Length of credit history makes up 15 percent of the FICO score calculation, coming only after payment history (35 percent) and amounts owed (30 percent),” he says. “Keeping your oldest card open is usually a good idea, as it shows lenders you have access to credit and are a responsible borrower. However, if you never use the card and pay an annual fee, it may not be worth keeping, especially if you have other cards that have been open for a long time.”
An old card helps your credit history only if it is used, Goldman says, suggesting it be used for a small recurring expense like a Netflix subscription, with any monthly charges paid with an automatic draw from a checking account to avoid missed payments.
Another factor is rewards like frequent flyer miles or cash back. While it’s easy to assume these perks are more valuable than they actually are, they can be significant to people like business travelers who use their cards a lot. So rank your cards according to the amount of perks you’ve accumulated, giving the more generous accounts a higher priority.
Also make sure you won’t lose the perks you’ve accumulated if you cancel the account. Generally, points dedicated to a specific purpose like flights on the issuer’s airline should still be usable after you cancel your card, while general points that can be used for a variety of expenses may be in jeopardy. Review the terms and conditions, which may be available online, or check with the issuer.
If your perks are at risk, think about redeeming them before canceling the card – by booking a flight or hotel stay, for example. Look on the card site, where you might find the points can be used for things you hadn’t thought of, like gifts, charitable donations, restaurant meal coupons or magazine subscriptions.
“With airline- and hotel-branded cards, you’ll typically be able to keep the rewards that have already been transferred to your frequent traveler account, but they may now have a time limit,” Weston says. “With United, for example, miles usually don’t expire as long as your card account is open. Once the card is closed, miles would be subject to rules that allow them to expire within 18 months if there’s no earning or redemption activity.”
Finally, note that you need to pay off your balance before you can cancel a card.
“One good way to do that is to open a new credit card account with interest-free balance transfers for some period of time and then pay off the debt before the new card starts charging interest on it,” Kagan says.
Alerting the issuer to your cancellation has another, easily overlooked benefit, Weston says.
“If the issuer knows you’re thinking of canceling, you may be offered a retention bonus. It may resemble your sign-up bonus, where you got a certain number of miles or points if you spend $1,000, $3,000 or $5,000, depending on the card, within three months.”