The cancellation of a credit card is part of the life of point & mile hunters. Before looking at the different steps to follow in order not to damage your credit report, you need to understand how the credit score works.
The components of the credit score
The credit score is calculated around five components:
- 35% – punctuality in paying your balances
- 30% – your use of the credit granted to you
- 15% – your credit history
- 10% – the types of credit you have available to you
- 10% – new applications
Thus, when you cancel a credit card , you will impact several of these components.
Using credit and cancelling a credit card
Credit usage accounts for 30% in the calculation of your credit score. It is therefore a major component that can be impacted by the cancellation of a credit card.
Let’s say you only have 2 credit cards, each with a $5,000 limit, for a total available credit of $10,000:
- If you use $3,000 of your available credit on both cards combined, your usage ratio is 30% (which we recommend).
- Now, if you cancel one of these two cards, and you continue to use $3,000 of your available credit, your usage ratio will mathematically increase to 60%.
Here, cancelling a credit card can therefore have a major impact on your credit report by destabilizing your usage ratio.
To counter this, it might be wise:
- to accept a higher credit limit (if pre-authorized by your issuer)
- to apply for another credit card upon cancellation in order to maintain similar limits
For people with many types of credit available (several credit cards, a mortgage, a personal loan…), cancelling a credit card is less of a problem since the impact on the usage ratio will be less.
Credit History and Credit card Cancellation
Credit history counts for 15% in the calculation of your credit score.
This history will be calculated both at the level of your credit (credit card, mortgage, personal loan…) and on your entire credit report (since when information has been reported to the credit bureaus).
If the credit card you plan to cancel has several years of service, this can have a serious impact on your credit report. To counter this, it might be wise:
- to make a product switch to a no-fee credit card in order to keep your credit history
- to keep the oldest credit card (and continue to charge transactions to it so that it is active in the eyes of the credit bureau)
Again, for those who have had credit instruments for many years or have only had a credit card for one year, the impact on credit history will be minimal.
As well, be aware that the cancelled credit card will continue to appear on your credit report for 6 years.
Important steps to cancel a credit card
Now that you have entered the two components impacted by the cancellation of a credit card, let’s look at the different steps to follow.
Use the rewards available on your credit card
Do you have cash back or unused points on your credit card? You will need to use them before you cancel the credit card. Otherwise these rewards will be lost.
If you only have a few points left, you could use them to buy a gift card, for example: a quick and easy way.
But if you don’t want to use them, there are several solutions available to you:
- Some institutions allow rewards to be used up to 90 days after the credit card account is closed.
- Alternatively, you may want to look for a credit card that is part of the same rewards program in order to keep your rewards.
Let’s take the example of two popular rewards programs:
- American Express Membership Rewards
- BMO Rewards
The American Express Membership Rewards example
The American Express Membership Rewards Program has 6 cards. Membership Rewards can be combined in a single “Membership Rewards” account when a card is cancelled.
There are, however, distinctions within this program between Membership Rewards” and Membership Rewards Select. The Select points cannot be transferred to airline programs.
As a result, Membership Rewards Select cannot be converted into regular Membership Rewards (but the opposite is possible, but not recommended, as this would result in a loss of transferability to airline programs).
Thus, it is possible to combine the Membership Rewards of 4 charge cards together:
- the American Express® Gold Rewards Card
- the Platinum Card® from American Express
- the American Express® Business Gold Rewards Card®
- the Business Platinum Card® from American Express
And it is possible to combine the Membership Rewards Select points from 2 credit cards together:
The BMO Rewards Example
For example, if you have points on your BMO® World Elite®* Mastercard®* (part of the BMO Rewards program), you may wish to apply for another BMO Rewards credit card BEFORE you cancel your BMO® World Elite®* Mastercard®*.
Simply call BMO and you can assign your credit cards to the same BMO Rewards account and keep your points in case of cancellation!
Those cards are part of the program:
Cancel all pre-authorized payments on your credit card
Over the months or years of using your credit card, you have probably had to pre-authorize certain payments (cell phone or internet bills, gym membership, etc.).
So remember to cancel all these pre-authorized payments on your credit card BEFORE you cancel.
In some situations, these payments would continue to be charged to your credit card, which could unknowingly affect your credit report! Some people realize this several months later!
What about your credit card insurance?
It is important to review the various purchases made on your credit card, especially those made in the last year (or the last two years for some cards).
In fact, you may have made purchases for which you could benefit from insurance!
This relates to:
- flight or baggage delay insurance
- trip interruption or cancellation insurance
- damage or collision insurance for a rental car
- extended warranty for certain purchases
And this last point about the extended warranty is often unknown.
For example, you may have bought a washing machine or an electronic appliance with your credit card. What happens if your appliance breaks after you have cancelled your credit card?
In some cases, keeping the credit card can serve as an insurance policy!
Cards such as the National Bank’s World Elite Mastercard® , which triples the warranty period on most of your purchases, come to mind!
Contact the issuer to cancel your credit card
Once all these steps have been completed, it will then be time to contact your credit card issuer to cancel it.
Depending on the institution, several methods are available:
- over the phone
- via secure messaging
- by post
With some institutions such as American Express or HSBC, it is even possible to do so by chatting from your online account!
When requesting a cancellation, the advisor may make a retention offer by offering you points or a discount on the annual fee. It’s up to you to see the relevance of this offer to YOUR situation!
If you proceed with the cancellation, ask for confirmation that the cancellation was done ON REQUEST (and not as a result of a decision by the issuer).
And ask for a paper statement showing that your card is cancelled with a $0 balance.
Monitor your credit report after cancellation
Cancelling a credit card is a well-established process: once you have cancelled your first credit card (and possibly learned from some of the mistakes you made), future cancellations will be easier!
For more information on this process, see this article on opening and closing credit cards.