Should You Cancel Your Credit Card After You Pay it Off?

Are you Cancelling your credit card...? Would it be a good option to cancel credit card after paying it off ?
CNN an American news-based pay television channel underscored reviews financial products such as credit cards and bank accounts based on their overall value. With the Covid-19 pandemic still wreaking havoc on the nation’s Financial economy, many people are making the wise decision to reduce their household expenses. Credit card annual fees are an obvious place to look at for cuts, especially if you have one or more expensive premium cards with travel perks that you can’t currently utilize.

But hold on! Closing your credit card to avoid an annual fee is a little like deciding to reduce your manicure costs by cutting off your fingers. There are many less drastic measures you can take in order to reduce how much you’re paying for your cards.

“Keeping a credit card open, even if you don’t use it, helps build credit,” explained Jill Gonzalez, an analyst at the personal finance website WalletHub. “You could honestly cut it up and keep it in a drawer, and it would still be better than closing it.”

In fact, there are a number of reasons not to close any of your cards outright right now, even if you have a lot of them. Let’s dive into why you should try to avoid cancelling your credit cards at this moment in time, and how can you still keep a card without paying an annual fee for it.

During an economic downturn, banks and credit card issuers typically tighten upon how much debt they’re willing to carry and how much credit they’re extending, instead of looking to hoard cash to ride out the storm. That means it’s harder to get approved for new credit during a recession, which means any credit you already have available to you becomes more valuable.

Therefore, the last thing you want to do is voluntarily give up credit that you can already access if you need to. You’re only making your life harder by reducing your options, especially if you've recently lost income from getting laid off or having your hours reduced.

“A credit card can be a helpful standby line of credit,” explained Lynnette Khalfani-Cox, the CEO and co-founder of Ask The Money Coach and author of Zero Debt: The Ultimate Guide to Financial Freedom. “I would recommend people keep cards open under the current circumstances. We just don’t know how long these tough times are going to last.”

And with so many unknowns still ahead of us — will sections of the country have to lock down again? Will the federal addition to unemployment be extended beyond July? — even if you’re currently in decent financial shape, you don’t know what your situation might look like three or six months from now. At some point, having ready access to credit might be the difference between being able to get groceries or going without.

Yes, in an ideal world, you don’t want to carry a balance on your credit cards. The interest rates are exorbitant, and the minimum payments are so low that if you don’t make a plan in advance to pay off your debt, you could end up stuck in debt for years on end.

But there are ways to intelligently use credit card debt in an emergency to make sure your basics are covered, and still have a way out at the end. However, you can only use this emergency lifeline if you have it, and closing your credit cards eliminates even the possibility of being able to temporarily finance your expenses when you don’t have any other options.

In our series on “Myths About Credit,” we’ve explained that while the action of closing a credit card itself doesn’t affect your credit score, the loss of an open credit line very well might.

“When people close a credit card, they’re under the mistaken impression that it will somehow increase their credit score,” said Khalfani-Cox. “Typically, what happens more often is there’s a negative impact on their score.”

That’s because of a concept known as the “credit utilization ratio,” which makes up a significant part of most credit scores — as much as 30% in some scoring models. Your credit utilization is calculated by adding up all of the debt you owe across all your credit cards and then dividing that amount by the total of all of your credit limits.

Using an example provided by Khalfani-Cox, assume a person has two credit cards. Each card has a $5,000 limit for a total of $10,000 in credit, and the person has charged $2,500 on each card for a total of $5,000 in debt, so they have a 50% credit utilization overall (because 10,000 divided by 20,000 is 0.5 or 50%).

Our hypothetical person decides to try to get a handle on his or her debt by getting a new credit card with an introductory balance transfer offer. They’re approved for the new card, which also has a $5,000 credit limit, and transfer both existing balances to it.

At this point, they’re in better shape than they were — they still have $5,000 in credit card debt, but now they have $15,000 in open credit lines, which means their utilization ratio has actually dropped to 33%. Credit scoring models ideally like to see utilization ratios of no more than 30%, so if you’re at a 33% ratio, you’re in slightly tenuous but not awful shape.

But if you then close those two old unused credit cards, you’ve made things worse, because you increased your utilization ratio to 100% by eliminating $10,000 in credit lines, leaving only $5,000 in credit as a result (which is now also completely consumed with debt).

Even though you haven’t changed how much you actually owe, you look worse to a lender, as a result, explained Khalfani-Cox. “Being maxed out statistically signifies more risk to lenders,” she said.

But many people don’t have a ton of credit, and some may be carrying debt, so it’s important to keep in mind the effect that closing a card can have on your credit score. Plus, by lowering the ceiling on your available credit, you make it more likely that a sudden need to use your remaining cards will max out all the credit you have left.

Of course, if you’re trying to cut your expenses, getting rid of credit card annual fees is a great idea, especially for cards you aren’t using. But if you already paid the annual fee months ago, closing the card now isn’t going to get that annual fee refunded (though some issuers may give you a prorated refund of the fee when you close a card).

However, if an annual fee recently appeared on your monthly statement, now’s the time to act. You usually have at least 30 days to make a decision on what to do with a card starting from the date the annual fee posts. So how can you keep the card open, but not have to pay the annual fee on it?

Simple. Call your credit card issuer and tell them you don’t want to pay the annual fee anymore.

Yes, it really can be that easy. Because when you make that call, the customer service agent on the other end of the line may be able to offer you one or even two options (and if they don’t, be proactive and ask about them).

First, you may be eligible for what’s known as a retention offer. Credit card issuers generally don’t like losing customers — especially profitable ones — after they’ve already spent money on marketing and sign-up bonuses to acquire them. So sometimes they’ll offer to waive or credit the annual fee for a year.

How common is this? According to WalletHub’s 2019 Credit Card Customer Service Survey, 77% of people who’ve asked a credit card company to improve their account terms or risk losing them as a customer has been successful.

Retention offers can also come in the form of bonus rewards, where the annual fee isn’t waived but the issuer gives you extra points or miles for remaining a cardholder. Under normal circumstances, these offers can make sense, but if you’re trying to cut down on your annual fees, extra travel points won’t help you.

But even if you aren’t eligible for a retention offer, there’s still another option, which the phone agent may volunteer on their own (again, ask if they don’t). In many cases, you can convert your existing credit card with an annual fee to a different card from the same bank, but one that doesn’t have an annual fee.

Converting a card gives you a major advantage over closing it — you’re keeping all your credit lines open, but dropping the annual fee entirely. It’s a flat-out win-win.

Believe it or not, this is an option that’s available for many credit cards, even high-end ones like the popular Chase Sapphire Reserve. If you’re not ready to pay $550 to renew your Sapphire Reserve for another year — or even the reduced $450 annual fee Chase is currently offering existing Sapphire Reserve cardholders — call and ask to be converted to the much-cheaper Chase Sapphire Preferred Card, which only has a $95 annual fee.

Related: Is the Chase Sapphire Reserve worth the annual fee?

Still too expensive? You can likely go even further and convert your Sapphire Reserve to a Chase Freedom Unlimited with no annual fee. Of course, a Freedom Unlimited card isn’t going to have a fancy $300 annual travel credit or earn 3 points per dollar on travel and dining, but it’ll keep your credit line open, and you’ll even earn 1.5% cashback on everything you buy with it.

There are two downsides to converting a credit card rather than cancelling the account, but frankly, both are relatively trivial given the current economic climate. One is that if you’re converting from a card with an annual fee to one without, you’re almost certainly giving up some of the better benefits of your old card, especially if it had a high annual fee.

A no-annual-fee card isn’t going to come with perks like airport lounge access or food delivery credits (though neither will a closed account, so there’s no loss if that’s your other option). A card with no annual fee also probably doesn’t earn the same rewards on your purchases. In some cases, the new card might not earn any rewards at all.

But the goal right now isn’t to earn fantastic rewards or have access to perks you can’t even use. It’s to maintain all your credit lines in case you need them. And it’s also possible you could end up better off if the new card is more aligned with your current needs than your old one.

How to Avoid These 6 Common Credit Card Scams ?

The methods are used to fight credit card scams are getting more sophisticated all the time. Unfortunately, so are the tactics used by credit card scammers.

More than 2.3 million cases of fraud and identity theft were reported in 2019, according to the Federal Trade Commission — an increase of 26% from five years earlier and 138% in a decade. Credit card-related scams accounted for a significant chunk of those cases, including more than 40% of identity theft reports. And those were just the cases that were reported to law enforcement and consumer protection agencies.

Whether they’re putting a new spin on an old scam or inventing a new scheme, calling on the phone or reaching out over the internet, credit card scammers are always lurking and looking to strike. Knowing how the most common scams work and how to avoid falling for them can keep your money and your identity safe.

Here are six common credit card scams you can watch out for. 

1. The Charity Scam

This credit card scam is a particularly cruel violation of people’s good-hearted instincts to help.

Right after a tragedy like a hurricane, flood or wildfire, scammers get to work, calling or emailing and appealing to people to help victims with a donation. They’ll often pretend to be from a reputable charity like the Red Cross or the Salvation Army.

When a “charity worker” calls with a detailed, sad story and asks for help, it can be hard to say no. The pleas for funds are often presented as urgent, too, to get people to cough up their credit card numbers quickly.

How to Avoid the Charity Scam

If you’re inclined to give money to help after a disaster, it’s best to do it proactively by contacting a charity yourself. You can check whether a charity is legitimate by using the IRS’ tax-exempt organization search or a resource like Charity Navigator.

If someone calls you seeking a donation, don’t give your credit card information, even if it seems legitimate. Write down any information they give you, then politely hang up. Search the web for the phone number and put quotation marks around the number in your search. Often, you’ll find that the number that called you has been previously been identified as a scam caller. If the charity is legitimate and you want to help, donate directly through its website.

2. The Hotspot Scam

It’s common advice to be careful when using a public Wi-Fi network since crooks could be monitoring these networks. But sometimes the network itself is a trap, carefully laid by credit card scammers who are waiting to pounce on your information.

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In this credit card scam, your smartphone or laptop finds a “public Wi-Fi hotspot,” and when you connect to it, you’re prompted for credit card information to pay for internet access. The hotspot is fake, and you’re actually giving your credit card information directly to the scammers. In other cases, the hotspot is free and does offer internet access, but the scammers watch your every move. They record passwords you enter, peek into your bank account when you check it and capture your data in other ways.

How to Avoid the Hotspot Scam

If you need to access public Wi-Fi at a restaurant or store, ask an employee for the correct network name and password information. Be wary of generic-sounding names like “Free Public Wi-Fi.” Avoid logging into your bank account or providing any sensitive information if you can.

Another way to protect yourself is to use a VPN or virtual private network. This creates a secure connection you can use even on unsecured public networks.

3. The Credit Card ‘Sign-Up Farm’ Scam

Victims of this credit card scam are often willing participants, duped by the promise of easy money for helping generate what they’re told are legitimate credit card rewards. In reality, it’s a scam to rip off card issuers, often on a massive scale. In May, federal prosecutors in New Jersey charged two men with running an elaborate “sign-up farm” that cost American Express  (AXP) - Get Report more than $8 million.

People running these scams recruit people with good credit and offer to pay them for the use of their Social Security numbers to open credit card accounts. The scammers rack up huge balances on the cards to generate rewards points, convert the points to cash, then cancel the purchases. In some cases, they don’t even bother cancelling, and the victim is left on the hook.

Victims are typically promised payments of $1,000 to $10,000 for the use of their information, although some never get paid. And they’re usually told that the spending on the cards will be legitimate, even though the whole point is to defraud the issuer. Victims can wind up responsible for huge balances, see their credit trashed and have their own credit card and airline rewards accounts frozen.

How to Avoid the Sign-Up Farm Scam

The lure of easy money can be hard for anyone to resist, and even more so for those who are struggling financially. But it’s wise to assume that easy money doesn’t exist.

The simplest way to avoid falling victim to credit card farming scams is to never give or sell your Social Security number or any personally identifiable information to someone else. To make sure no one is using your identity to open accounts without your knowledge, check your credit report for any irregularities.

4. The Interest Rate Scam

Millions of people are familiar with this classic robocall scam. You answer a phone call, often from an unknown number, and a recorded message gives you the great news that you’re eligible to negotiate significantly lower interest rates on your credit card balances. The message claims to have inside connections to credit card companies and can work on your behalf to reduce your payments by thousands of dollars. There are no such connections — the whole thing is a setup to get you to reveal your credit card information.

If your interest is piqued enough to continue listening, you’ll be taken to a live operator. The “helpful” representative will quickly ask you sensitive questions to harvest your personal data and credit card information.

In a slightly more legitimate — but still costly — variation of this scheme, the caller contacts the credit card company and successfully lowers your rate, and you get charged hundreds or thousands of dollars for the service. The problem is that they aren’t doing anything you couldn’t have done yourself for free. You have just as much clout with the credit card company as a third party when it comes to lowering your interest rate. Your issuer may give you the option to transfer your balance to a different card that offers a lower APR.

“If you’re looking to reduce the interest rate you’re paying on your credit card purchases, your best bet is to handle it yourself for free,” says the Federal Trade Commission. “Call the customer service phone number on the back of your credit card and ask for a reduced rate.”

How to Avoid the Interest Rate Scam

If you want to lower your credit card interest rate, reach out to the issuer directly. It won’t hurt you to ask, even if they say no.

If you do get a robocall promising to cut your rates — or any other offer that sounds too good to be true — just hang up. Never give out or confirm sensitive information to someone who calls out of the blue. To reduce sales calls, put your phone number on the National Do Not Call Registry, then keep in mind that legitimate businesses adhere to the registry while scammers don’t.

5. The Overcharge Scam

This credit card scam is gaining ground as fewer transactions are handled in cash and more shopping moves online. It goes like this: You get a call or a text telling you that your credit card was overcharged on a recent purchase. How helpful! The problem is that it isn’t true. The scammer will ask a bunch of questions intended to get at your personal information.

According to the Better Business Bureau, this scam is especially convincing because the scammers will often address the target by name. And with more and more small, everyday purchases being put on credit cards, the vague “recent purchase” angle becomes more convincing.

How to Avoid the Overcharge Scam

Don’t give sensitive personal information over the phone. Hang up. Check your credit card statement. If something there seems out of whack, contact your credit card issuer yourself by calling the number on the back of your card.

6. The Skim Scam

It was hoped that the widespread adoption of EMV chip technology would wipe out skimming, but it has proved persistent. In fact, the latest data from the credit scoring company FICO  (FICO) - Get Report found that the number of payment cards compromised at merchant card readers and ATMs increased 10% in 2017.

A skimmer is a small electronic device installed by crooks on card readers on gas pumps, ATMs and elsewhere. The skimmer reads the information from the magnetic stripe on your credit or debit card when you swipe or insert the card. They can be hard to detect, and some of the newer ones are all but impossible to see with the naked eye.

Skimmers are especially prevalent in tourist-heavy areas during high season. According to the Florida Department of Agriculture and Consumer Services, “it’s critical that people are aware of exactly what to look out for because each skimmer can defraud consumers up to a million dollars.”

How to Avoid the Skim Scam

Though skimmers are often well-concealed, sometimes you can tell that something looks off. Look for signs of tampering on ATM or gas station card readers, including devices attached on top of or beside the card slot. Move toward using a mobile wallet and contactless payments to avoid using your physical card.

Finally, it’s important to remember that if you have negative information related to a credit card account, closing that card won’t make it go away, however,your entire history with a credit card stays on your credit report for up to seven years, even after you’ve cancelled the card. So don’t expect that closing a card that you’ve missed payments on will improve your score.

Of course, if you’re overly tempted to use a credit card to buy things you don’t really need and can’t afford otherwise, then you should probably cancel the card, regardless of the effect on your credit score. Missing payments count against your score more than any other factor, and credit card debt is a burden that can affect your life in profound ways if you don’t have a debt management plan in place. So be wise and make sure you’re only using credit for convenience, and not to splurge on unnecessary luxuries.