Learning finance

5 things to do before closing a credit card

Don’t even think about canceling this card until you’ve done these five things.

Canceling unused credit cards can free up space in your wallet and give identity thieves one less way to sue you, but it’s not as simple as you might think. There are a few details you need to sort out before canceling your card so you don’t run into any issues later. Be sure to do all five things listed below.

1. Understand the impact on your credit score

Closing a credit card will hurt your credit score because it will lower your credit utilization rate. It is the ratio between the amount of credit you use each month and the amount you have. You want a ratio of 30% or less. Anything higher indicates that you need a lot of credit to maintain your lifestyle, which worries lenders. Closing a credit card could also lower the average age of your account, another factor that affects your credit score. This is especially true if you’ve owned the card for a long time.

Think carefully before closing a credit card if it would increase your credit utilization rate to more than 30%. If the card doesn’t charge you an annual fee, you might be better off leaving it open. But if so, you’ll have to charge less on your remaining credit cards when you cancel it. You should also split your spending between your cards to make sure you don’t go over 30% of your credit limit on a single card.

2. Pay off your balance

Those with an outstanding balance should work to pay it off before closing the card if they wish to get rid of debt permanently. Technically, you don’t have to pay off your balance to close the card, but you’ll still be responsible for paying off the debt even if you’re no longer a cardholder, and your balance will continue to accrue interest at the same rate. like before.

Consider a balance transfer card if you can’t afford to pay off the debt right away, but still want to get rid of the card. You’ll pay a fee, usually a percentage of the balance, to make the transfer, but your balance won’t accrue interest for the introductory period, which can last anywhere from six to 21 months, depending on the card. This will allow you to pay off what you owe more quickly.

3. Use all rewards

Although you still owe your outstanding balance after canceling a credit card, card issuers aren’t kind enough to let you keep your credit card rewards. Unless you have another card from the same issuer as the one you hold, you must use all rewards on your credit card before canceling your card.

Check your online account or your latest credit card bill to see how many rewards you currently have and review your redemption options. Some cards will let you use your rewards to reduce your next credit card bill if you can’t find anything else you like.

4. Inform authorized users

You must notify all Authorized Users of your intention to cancel your credit card. Otherwise, they might attempt to make purchases, only to see the card declined. Reach out to them and let them know when you plan to cancel the card so they can appropriately plan future expenses.

5. Switch recurring payments to another card

Go through your credit card statements for the past year and look for automatic payments on that card. If one of them is to be repeated, you must transfer it to another credit card. Failure to do so could result in service disruption and undeserved late fees.

Make a list of all automatic payments, then log into your online account for each one or contact the company by phone to update your credit card information. Doing this before canceling your old credit card is the best way to avoid problems.

Following the steps above might seem a bit complicated, but that’s nothing compared to the problems you might have if you ignore them. But if you think canceling your card is the right thing to do, first be sure to set aside about half an hour to do the five things listed above.

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