What Happens When You Close A Credit Card Account?

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Are you done with one of your credit cards? Are the rates and fees too high, or the rewards not competitive? Then you are probably wondering what will happen if you close that account.

How closing an account affects your credit score

In general, it does not help your credit score to close unused accounts, although it’s a common myth that closing an account immediately hurts your credit score. Closing an account will reduce your credit utilization ratio, which is the total amount of debt you have divided by the total amount of credit extended. Another reason is that it will reduce your credit history, which is the average age of accounts on your credit report.

The degree of the effect on your credit score will depend on how many accounts you have and how much debt you have. For someone with multiple open credit accounts and very little debt, the effect will be very small. Those who have few open accounts and significant debt could see a larger effect on their scores. In addition, those with longer credit histories will be less affected by an account closure than those with a shorter credit history and closing several accounts will have a greater effect than closing just one.

Nevertheless, the cardholder's length of credit history (15%) and their credit utilization ratio are relatively small factors that make up their credit score compared to their payment history and their total amount of debt. Finally, those who have their accounts closed by the lender for delinquency or default will see a substantial drop in their credit score.

What happens to your rewards when you close an account?

Reward credit cards are extremely popular, but many cardholders are concerned that their points and miles will be forfeited if they close their account. Those who are earning rewards from a third party, such as an airline or hotel, will always be able to keep any reward points and miles that have already been deposited in their airline or hotel program. Banks transfer these points and miles to other programs, and there is no provision to revoke them in the case of account closure. The only exception would be for points and miles that may have been earned in some way, but have yet to be transferred to the airline or hotel program. In some instances, banks will withhold those points if a customer is not in good standing, but check the credit card's terms and conditions to be sure.

On the other hand, cardholders can lose unredeemed rewards that are part of a program directly operated by their bank. For example, cardholders can lose points in Chase's Ultimate Rewards program or the American Express Membership Rewards program if they cancel all of their eligible cards. Likewise, those who have earned rewards with the Costco True Earnings American Express cards will lose them if they close their account before they receive their annual award certificate in February.

What should you do?

For most cardholders, the best thing to do with an account you don't like is to stop using it, but don't close it, at least until any annual fee is due. In this way, the account continues to contribute to your credit history while improving your credit utilization ratio. Once the annual fee is billed, cardholders should call the card issuer and close the account, unless the card issuer is willing to waive the annual fee.  Of course, cardholders should be sure to redeem any unused rewards first.

In the case of credit cards that earn points in Chase's Ultimate Rewards program or the American Express Membership Rewards program, for example, cardholders can retain access to these points by holding another card that is part of the program. For example, someone could keep the points earned by their American Express Platinum card, which has a $450 annual fee, so long as they have an Amex Everyday card, which has no annual fee.

There is another reason why some cardholders will want to close their accounts. Those who have such difficulty controlling their spending that having access to credit will result in debt, might be tempted to close their accounts. Alternatively, these cardholders can simply cut up their cards, while leaving their account open. Doing so will preserve the benefits to their credit score while denying them immediate use of their line of credit.

There is a certain satisfaction that you can feel when you tell your credit card issuer to take a hike. But when credit card users understand the consequences of closing their accounts, they can make the best decisions for their individual needs.

Alternatively, find out what happens when you open a credit card account.

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