How to cancel a credit card

Want to simplify your financial life?

Canceling unused credit lines is a good way to start.

Pick a card, an empty card 
Take a close look at all the credit cards and store cards bursting through the seams of your wallet. Do you really need all those cards? Do you even remember the last time you used some of them?

"Canceling unused accounts is an excellent idea," says Howard Strong, author of What Every Credit Card User Needs to Know. "Why have all these accounts if you're not using them?"

So pick two or three favorite cards and cancel the rest. You'll have fewer credit lines tempting you to spend and fewer bills to pay.

Before you start cutting up the cards, however, keep three things in mind:

• It's important to only cancel credit cards with empty credit lines. If your balance is anything but zero, you'll want to keep the account open until you pay it off.

• Don't let a card issuer know that you're thinking of leaving until you've paid off the balance. Some issuers will jack up your interest rate if you try to cancel while you have a balance. "If you close an account when you maintain a balance, they increase the interest rate to the maximum allowed as a penalty," says Steve Rhode, president of Myvesta.org, a financial crisis and treatment center.

• This strategy isn't for everyone. If you plan to take out a mortgage or car loan in the coming months, canceling credit cards could actually worsen your chances of getting favorable terms (more on that later).

Contacting your creditor
The first step in canceling a card is to contact the card issuer. Many issuers let you cancel an account by phone.

"Some credit cards let you do it without even talking to somebody," Rhode says. "Press five to close an account."

You may be transferred to a special service rep who will try to convince you to keep the card. If you've been a good customer, you might want to block out some time.

"They transfer you to a special section and try to convince you for 10 or 15 minutes that you're making a terrible mistake," Strong says.

Go ahead and listen. They may be willing to knock down your interest rate, waive an annual fee or upgrade your card from standard to platinum. Some issuers of air mile credit cards have been known to offer two-for-one plane tickets or travel vouchers to customers looking to leave.

"In the end, unless you get some stupendous offer, don't be persuaded by the salesman at the other end of the phone," Strong says. "Most people have more credit cards than they need."

If the new-and-improved card deal is better than other cards in your wallet, you may want to consider keeping it and canceling another card instead. Otherwise, stick to your guns and cancel away.

Be sure to ask your issuer to report to the credit bureaus that the account was "closed at customer's request."

Make note of the day and time you called and to whom you talked for your records. A written confirmation that an account has been closed should be on its way from the card issuer.

"They generally send out a notice immediately -- the same day or the next day," Strong says.

Hang on to this notice for your records. That way if anything goes wrong with the account at a later date, you've got proof that you closed it.

If you have balances spread out over several cards, you may want to consolidate balances on one or two low-rate cards and cancel the rest. 

When not to cancel
But not everyone should start canceling all kinds of credit lines. If you're planning to buy a house or car soon, you may want to hang on to your unused credit lines until after you've qualified for a loan.

"If your goal is to improve your credit score, closing accounts is not a good tactic," says Craig Watts, consumer affairs manager for Fair, Isaac and Co. based in San Rafael, Calif. "Paying down credit cards is terrific. Closing them is not going to help."

Canceling a large amount of unused credit could actually hurt your credit score.

Credit-scoring models look at a number of factors when calculating your score, including the result of the following formula: The total amount of debt on credit cards and revolving accounts divided by the total amount of debt available on those accounts.

This formula results in a fraction less than one. The lower the fraction the better. A score of one would mean your outstanding debt equals your available credit and you've maxed out your cards.

Let's look at an example. Let's say you've got $5,000 of debt and $15,000 in credit lines. By dividing 5,000 by 15,000 you get one-third. You're using one-third of the credit available to you.

Now let's say you cancel an unused credit card with a $5,000 limit. You've still got $5,000 of debt but only $10,000 in credit lines. By dividing 5,000 by 10,000 you get one-half. You're now using one-half of the credit available to you.

The closer to one this fraction gets, the more it hurts your credit score.

"When you cancel unused credit cards without paying down your credit debt you change that ratio so it appears as though you're closer to being overextended," Watts says.

The best advice for a home or auto shopper is to hang on to credit lines until after you've landed your loan.

"Wait until you've been approved for the loan and have the money in hand and then start closing accounts," Watts says.

If your credit card balance is zero, go ahead and close as many unused accounts as you want. As long as your credit cards are balance-free, it won't hurt your credit score a bit. So call those card issuers and cut away.

If you're in credit trouble or if you had credit problems in the past and you know an open credit line is just going to tempt you to spend -- go ahead and close the account.

Yes, it may ding your credit score a bit. But if it will keep you from acquiring more debt, it's best to do it. You can worry about building up your credit score after you're back on your feet financially.