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Our experiences during the Great Recession showed that in times of a financial crisis, consumers usually rely on credit cards to buy their basic needs. Without cash, this is their last resort. We justify that funding basic needs like food is important but using your credit cards to do that gives a somewhat temporary relief.
It is true that closing your credit card is not really necessary as long as you know how to use it but in a nation that is known to be great spenders, is proper credit card use something that we can really live up to?
Follow these 4 steps when closing credit accounts
If you want to play it safe, then go ahead and close your credit card account - or at least some of them.
But how do you go about closing your credit card properly? Do not be too quick to call your creditor and ask them to close your card. You should also keep yourself from just ignoring the card and not using them. While they will be cancelled eventually because of inactivity, come credit cards may have charged you with annual fees that could accumulate if you do not pay them off.
Given that scenario, here are the 4 steps that you need to follow when closing your credit card accounts.
- Pay off the balance first. Credit cards can affect your credit score especially when you close the accounts that you still owe money to. This is because your credit utilization will suffer. Let us assume you have 3 cards with balance and limit of: $1,500/$3,000, $1,000/$5,000, and $750/$4,000. That means your total balance to limit is $3,250/$12,000. That means your credit utilization is only 27% - a healthy percentage compared to the ideal of 30%. However, if you close the first card with the $3,000 limit without paying the balance first, your balance to limit will now become $3,250/$9,000. That means your credit utilization will now be 32%. That can hurt your credit score. You need to pay off credit card debt first before you go ahead and cut off your credit account.
- Call your creditor through the customer service. Once you have paid off your balance, you can now call the customer service of your credit card issuer. In most cases, you can find the number at the back of your credit card. Let them know that you intend on closing your credit card and you can even tell them the reasons why. Be prepared to engage in some sales talk as these customer service representatives will try to discourage you from closing your account. But if you have crunched the numbers and you believe that this card is not important, then close it off. Make the request to close it and take careful note of the date and time of your request. You may want to get the reference number of the call and the name of the agent you are talking to.
- Make a letter and send it to the creditor with a return receipt request. This is to ensure that the creditor knows of your request and will act on it accordingly. Include in the letter your name, contact details and the last 4 digits of your credit card number (put an x on the rest and show only the last 4 digits). Write the details of your call too for confirmation. Use the certified mail system. Keep a copy of the letter and monitor the return receipt.
- Monitor your credit report. You should see the change in your credit report so make sure you monitor it for the next few months. After you have made your request, wait for a month or so to look at your credit report. Your report should reflect it already. This will also help you check how this action of yours affected your credit score.
Americans and their credit card use
According to an infographic published on InfographicsCreator.com, the average credit cardholder owns 4.4 cards. In fact, 10% of consumers have more than 10 credit cards. While 54% of cardholders have made it a habit to pay their balance in full every month, this is still dangerous because you are still more likely to overspend your monthly budget. According to the infographic, credit card purchases are expected to rise by 33% by 2017.
This is a huge growth considering our current credit card balance of $872 billion - which is according to data found on NerdWallet.com. The average credit card debt per household is $7,221 - this includes all households. But if you only include the households that have actual indebted records, the average goes up to $15,480.
While there are some reports that a lot of Americans have shown positive changes in the way they manage their credit cards, the debt of consumers continue to rise.
You may want to choose only the few cards that you will retain in your wallet. If you are one of the people who own 10 or more credit cards, you may want to think about closing some of them.
Credit cards you should avoid closing
But take some time to choose which of your cards you will close. There are certain cards that you should refrain from closing and here are 5 of them.
- The cards with balance. We have identified the reason why you need to pay off your credit card debt. It will affect your credit score. Not only that, creditors will ask you to pay your debt immediately. You need to be prepared to do that.
- The only card that has available credit. If you have to choose among the cards that you want to close, you should also avoid closing your credit card with the only available credit. If you have maxed out your cards and this is the only card you have that is not up to the limit, then do not close it. Doing so will affect your credit score. In fact, do not close any card just yet.
- The only card that you have. If you only have one credit card, do not close it off. You will need this to maintain a good credit score. Credit card debt elimination does not require you to have zero credit cards. If you know how to use it properly, you do not have to worry about debt at all.
- The oldest credit card. This will also affect your credit score - especially your credit history. A shorter credit history might lower your score unnecessarily. If you have to choose a card, pick the new ones. But of course, this will depend on which cards are really useful and beneficial to your spending lifestyle.
- The cards with the best terms. While you need to keep the older cards, make sure you analyze your spending habits first. If your new card is better when it comes to complimenting your spending lifestyle, then it is better to close the older account that more inappropriate for your purchases.
Here is a video of Suze Orman as she discusses when closing your credit card is okay and when it is not.