There has been a raging debate over whether or not to permanently cancel credit cards and/or close credit cards. I’m also well aware that there are benefits and drawbacks on either side and that no one solution will fit everyone’s financial goals perfectly.
That being said… I’ve decided to take an aggressive approach in officially declaring war on my debt. Its an approach that is working wonders for my wife and I, and one you might want to consider if you aren’t satisfied with your current strategy. Here’s the thing… I have absolutely no interest in trying to “game” credit cards. The thought of having 4 different cards (one for gas, one for groceries, one for target, and one for amazon, etc…) actually makes me want to smash my head into the keyboard. Constantly changing my set-up in search for the optimal method to get 2.12% back on all my purchases seems like one big distraction.
Instead I’ve decide to try to refocus that energy into substantially increasing my income, in addition to ways I can further decrease my monthly expenses.
Let’s review some of the basic benefits and drawbacks of closing credit card accounts:
Potential Benefits Of Canceling Credit Cards:
- Lowers Risk of Identity Theft
By now most consumers have come to realize that Identity Theft is a very real and very annoying crime. In fact, many sources identify it as the fastest growing white collar crime in the world. Although, I will save all the measures one could take to help prevent identity theft for another post, I will say that closing an individual credit card will at least help negate any crimes with that specific account. Sure it won’t keep someone from opening new accounts, but it will provide better peace of mind than having several old, open accounts siting unused and exposed.
- Simplifies Your Financial Accounts
Personally, this is a big one for me. I thrive when I can fully grasp my complete financial situation with a quick review of my accounts. For that reason I try to minimize my accounts overall into just 1 checking, 1 savings, 1 debit card, 1 retirement account, etc… The more simple something is the higher the probability that I maintain control. I know there are people that would gladly add complexity if it meant only a slightly better return on their money, or a slightly better reward on their spending. Theoretically and certainly mathematically, this strategy often prevails, but in practice I’ve come to find a simpler, slower, and more controlled approach usually wins the race.
- Prevents Unexpected Or Erroneous Fees & Changes of Service
Until recently I wouldn’t have given much merit to this benefit. However, in the last two months, I’ve heard three separate stories about charges that have been mysterious put on old credit accounts. In one case specifically, someone recounted their frustration to me that a credit card recently added a $52 dollar charge from 5 years ago! This was a legitimate charge that for whatever reason had not shown up on the monthly statement. The gentlemen I reference is of course vehemently fighting the charge and will most likely not wind up paying anything. He does, however, get the pleasure of jumping through hoops and hopping from supervisor to supervisor for the next month or so as it gets cleaned up. As the economy continues to slow, don’t be surprised to see these kind of stories on the rise.
- Uses Less Paper/Energy To Issue Paper/E-statements
Although most credit card companies won’t send monthly statements on older accounts with no balances, some do still send year-end statements, changes in services announcement, random letter with one-page of legal crap on it, etc… I’m always a fan of less junk mail, which is why I always strive to use electronic notifications and statements. Even electronically though, the less useless and unnecessary information that I have to process the better.
- Makes It Easier To Review Credit Reports For Errors
I recently saw a video which claimed that over 75% of all credit reports of some sort of error on them. Of course the burden falls squarely on you to notice, reconcile, and ultimately report any errors. Luckily, the burden then gets shifted and although it might be a rather scary process at first, cleaning up your report is simple if you able to carefully follow instructions. I always suggest checking credit reports at least every 4 months (using AnnualCreditReport.com to pull one free every year from each of the three bureaus). This process is made exponentially easier if any unused and unnecessary accounts are closed. While it’s still good to scan closed accounts, the majority of errors will occur on your open accounts.
- Eliminates The Opportunity To Frivolously Re-Enter Debt
Obviously, this will be a huge benefit for some and a rather small benefit for others. I always find that people, including me, think they are better, faster, stronger, smarter than they really are. In other words, the majority of us always think we are the exception or that certain theories don’t apply to us. I caution you to really review your spending with credit vs. debit/cash. Often times, especially online, it’s significantly easier (psychologically and physically) to purchase things with credit than with debit/cash. Leaving credit cards open also makes it psychologically harder to save an emergency fund, after all you could pay down debt with that fund and always use the credit in an emergency. Again, honestly ask yourself if your so-called “emergencies” tend to happen more frequently when you use a credit card as back up rather than a hard-saved emergency fund.
Potential Drawbacks Of Canceling Credit Cards:
- If Active Balances Exist, Raises Your Credit Utilization Rate
Your “credit utilization” accounts for 30% of your overall credit score. For example, if you had $3,000 in debt and $20,000 in credit limits on your revolving accounts you would be using 15% of your overall credit. Closing a $10,000 credit card with no balance on it would then double your “credit utilization” rate to 30%. This change would have a negative effect on your credit score. It should be noted that if you owe no debt canceling all of your accounts would obviously not change your utilization rate. However, having no open revolving accounts would negatively effect your “mix of credit” which accounts for 10% of your credit score.
- Closing Older Accounts Will Lower Average Credit Length/History
Your account history accounts for 15% of your overall credit score. Closing any accounts that are older than your average credit length will negatively impact your credit score. If someone were to review your overall credit report they could still see an established history, however that won’t help your actual numerical score.
- A Lot Of Home/Car Insurance Companies Use Credit Scores When Determining Rates
This trend has really picked up in the last couple of years and is even being fought in the courts in more than a handful of states. The latest figures I’ve read say that 75-80% of all insurer’s now use credit scores when figuring rates. On the flip-side that still leaves 20%-25% of companies whom don’t use credit scores at all. For example, my personal insurance agent informed me that they currently do not use credit reports on the majority of clients. However, he was quick to point out that unless legislative comes out banning this practice, he sees the industry continuing to head in that direction.
- A Few Employers Look At Credit Scores Before Hiring
This trend is a lot less frequent, but is still a potential drawback. This only commonly takes place with higher-paying careers within the financial sector. Even then, most experts are quick to point out that companies are much more likely to look at the credit report as a whole, rather than just the score in these situations.
- Inability To Earn Reward Points, Cash-Back, Or Airline Miles
Usually, even the best systems, using multiple cards for different categories, will return just over 2% on combined purchases. More frequently, the average consumer earns between 1% and 1.5% in rewards. Although this is certainly a tangible amount in the long run, multiple surveys/experiments have been conducted on the increase in spending due to credit. From average ticket price comparisons at McDonald’s to increased spending at the grocery store, those people who use credit on average spend 12-18% more depending on which survey you read. That’s why it’s such an effective business practice to encourage using credit even though the credit card companies charge the vendor’s fees. Theoretically, only charging recurring utility bills and other fixed expenses without increasing spending could result in a 2% return on those expenses.
Obviously, in order to make the commitment to “declare war” and cancel all of your credit cards, you will have to find more value in the potential benefits than in the potential drawbacks.
I personally don’t have any reason to want to use credit. So the impact on my credit score is negligible, especially if I take time to shop around for insurance. If I was three weeks away from closing on a home, I might choose to wait. (I might also convince my self to reevaluate buying a home while juggling consumer debt.) I also actively choose not to play the credit card “game” in an attempt to earn 2% back on my purchases. I don’t feel playing a game that encourages spending is in line with my goals to continually decrease monthly expenses. I’ve completely eliminated any temptation there might be to carry a balance even for one-month.
Your financial goals and life experiences may be different. As I mentioned earlier, if you aren’t satisfied with your current strategies, I suggest you strongly consider stepping it up a notch. Weigh the positives against the negatives and devise a plan that will give you the highest probability of exceeding your current goals.
If you are going to cancel your credit cards, you will want to make sure to do it correctly.
- Call Customer Service – Usually this number is most easily found on the back of your card or with a quick Google search. Tell them you’d like to completely close the account. Most of the time they will ask you why and/or transfer you to a customer retention department. Don’t be surprised to be offered lower interest rates, special bonus points, and other perks to keep your account open. Don’t let anyone talk you into keeping a card you don’t want at this point in the process. Thank them for the generous offer, but insist on closing the account. Be sure to request written confirmation once the account has been closed.
- Mail A Letter – The letter should be short and sweet. It should contain your contact information at the top. In the body, reference the phone call you made to cancel the account along with the date you made the call. Confirm you would like to cancel the account and receive written confirmation upon completion. For extra verification, you could send this certified mail to ensure it was received and signed for.
- Check Credit Report After 30 Days – Often times credit card companies report once a month to the credit bureaus. Because specific dates can vary from company to company, waiting 30 days should mean they’ve had plenty of time to close the account and report it to the agencies. Often times you can see online that the account has been closed within 48 hours. You should still verify your credit reports are accurate!
- You May Have To Repeat Steps 1-3 – Unfortunately, all too often companies will close the accounts in their systems, but will not upload the information to the credit bureaus in a timely manner. Continue to call, mail, wait, and verify until your credit reports are accurate and up-to-date. When in doubt, ask for a supervisor!
Have you “declared war” on your credit cards? Has the choice to cancel your credit cards or close your credit cards been positive? Let everyone know by commenting below!