6 steps to closing a credit card

By Tim Sullivan

Thinking about closing a credit card account? Closing a credit card account can prevent you from using too much credit, reduce your risk of identity theft and make keeping track of your finances easier. However, it can also have a negative effect on your credit score.

Part of your credit score is based on how much of your credit you actually use. When you close an account, especially a larger account, your credit-utilization ratio (CUR) will be affected and your score could go down. In addition, if the card you're closing was the first credit card you ever got, it could shorten the length of your credit history, which can also hurt your score.

Too many cards

That said, tell me if this situation sounds familiar: You have to buy a dress or a suit for a friend's wedding. It's tough financially, but it's their wedding -- a once-in-a-lifetime occasion. You pick one out and when you get to the cashier, he offers you an additional 20 percent savings if you sign up for their store credit card. Plus, with the card, you get free alterations. Done.

I've had a lot of friends get married recently.

Maybe you've encountered this situation too, and now you have too many cards for specific stores and would like to simplify your credit life a bit. Or maybe a card with an annual fee has outlasted its welcome in your wallet. In these cases, closing a card (or cards) can be an appealing notion. Here are six steps for getting it done:

1. Target the card that costs you the most first

If you are going to close multiple cards, close just one account at a time. Closing too many cards at once can cause your credit score to drop sharply from a snowball effect of the reasons mentioned above.

To determine which card you should close, calculate which one is costing you the most -- whether through the high annual percentage rate (APR) you're paying on its balance or the steep annual fee that's drawing nearer -- and make it your goal to close it first. Be sure to factor in any rewards you get from your cards, however, to make sure you're conducting a full analysis.

2. Pay the balance in full

This may seem obvious, but I've chosen to mention it so there's no confusion. Trying to escape a card that still has a balance is a terrible idea for a lot of reasons, not the least of which is the damage it will wreak on your credit report. If you can't pay the balance in full, consider transferring the balance to a card with a lower APR.

3. Declare your intentions with your issuer

I always prefer to try to cancel a card over the Internet first. It avoids the sales pitch from the person on the other line when I try to cancel. But if need be, call your credit card company and stay firm when they try to keep you as a customer. Remember your reason for calling.

4. Send a written confirmation of cancellation

Keep a copy for your records as well. This will give you more leverage if the account appears open after your verbal cancellation.

5. Dispose of the card properly

Once you're certain that the account is closed, cut up your card and dispose of it in multiple loads of trash.

6. Keep an eye on your credit report

If any errors, occur, it's your responsibility to correct them. Keep a tab on your score. It may take a few weeks for any changes to occur, but watch carefully to see if cancelling your card has a negative effect. If it does, weigh carefully whether you want to close any other accounts.

Whether you should close a credit card account can be a tough decision. Do the benefits -- which sometimes are only psychological -- outweigh the potential damage to your credit score? That's a call only you can make. But if you've struggled with overspending in the past, it is one way to reduce your temptation and simplify your finances.