3 steps to take before closing a credit card

Debt counsellors often caution against opening more credit cards than you can realistically pay down. But you should handle closing credit cards with just as much care.

The main reason to proceed with caution in purging plastic from your wallet is to preserve your credit utilization ratio (the amount of debt you owe compared to how much credit you have). A low credit utilization ratio is important to having a good credit score.

"If you have access to $50,000 worth of credit ... and you're typically utilizing only two to three thousand dollars of it, that's going to make your credit look pretty good because you have a low utilization," says Douglas Hoyes, co-founder of Hoyes, Michalos and Associates Inc., a Toronto-based debt-management and bankruptcy firm. "If you cancel all but one of your credit cards, maybe your utilization goes way up and that could potentially have a negative impact on your credit score."close-card

Additionally, your credit score takes into account how many cards you have, and having too few could be damaging.

However, sometimes, it's vital to close a card, perhaps to resist spending temptation or just because you don't use the card and you're paying an annual fee. If you need to cancel a card, take a few steps to do it properly.

1. Pay off outstanding balances.
You can't cancel a credit card if you still carry a balance on it.

"[The credit card issuers] are not going say, 'Oh yeah, sure, fine, you can walk away from it,'" says Hoyes. "What you would have to do in that scenario is make an arrangement with them to pay off the balance."

If you aren't struggling with debt, you may just be able to stop charging and pay the card off quickly so you can close it. However, if you have bigger issues, you may need to ask for help.

Hoyes recommends asking your credit card company to prevent any new charges on the card, while you work to clear the debt.

As a last resort, filing for bankruptcy or a consumer proposal will automatically shut down your cards.

"It's a requirement of the bankruptcy process that you must surrender all your credit cards, so that would be a final, obvious way to definitely make sure the card is canceled," says Hoyes.

If you carry balances on too many cards that you can't pay, seek professional advice, he adds.

2. Do an audit of all the credit cards you have.
Once you pay your debts, it's time to decide which credit cards to close and which ones to keep.

There's no magic number for how many credit cards you should have. Hoyes says to consider your income and do what feels right to you.

"My rule of thumb is fewer [credit cards] are better than more," he says. The more you have, the higher risk you will appear to be in lenders' eyes. And more cards means more opportunity for fraud to slip by you, making you an easy target for criminals. He recommends having two cards: one for regular use and one for backup, or perhaps one for personal use and the other for business. Other than that, he says, you need to take stock of your cards and decide which ones can go.

"For example, a department store credit card -- if you have no intention of shopping at that department store anymore then why have the card?" he says. Or you may have gotten a card with a generous rewards sign-up bonus, and it's been collecting dust ever since you banked the points. Ask yourself, "‘Do I have a credit card that I don't need and I don't use, that may be charging me a fee?'" says Hoyes. "If this is the case, close the card."

Just keep your credit utilization ratio in mind. Hoyes recommends using no more than 20 to 30 per cent of your available credit at one time, but says you should also balance your available credit with your income.

"No one knows what formula TransUnion or Equifax are using to determine your credit score," he says. "A high-limit, no-fee card may be fine if you have nothing owing on it and you only use 20 to 30 per cent of its available credit. However, if your available credit far exceeds your income, regardless of low utilization, you may still have trouble getting a loan or receiving more credit."

Hoyes also recommends keeping the credit card you've had the longest, as it's is a good way to show credit history.

3. Make sure the card is actually closed.
Your card won't automatically close with disuse (though it may), and cutting the card isn't the same as closing the account.

"Make sure your credit card is actually closed because you don't want to be charged any further fees," says Hoyes, "and there's an identity theft component where you'll want to make sure no one else has access to that card. Plus, if you're making automatic payments to that card, you'll want to make sure that link to your bank is severed, too."

Once you've told the issuer you want the card closed, Hoyes recommends following up later to confirm.

"There are two ways to do that," he says. "The first way would be to phone [the card company], and the second way would be get a copy of your credit report and see what's on there."

See related: 7 surprising facts about your credit score, Why issuers close credit card accounts
Updated November 30, 2015

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