When you think about the costs of using your credit cards, you might decide you're better off canceling most of them. In fact, one way to manage high credit card debt is to get rid of some of your credit cards. Having too many cards can lead to overspending.
But before you start closing credit card accounts, take some time to figure out which ones are best to close and which ones you're better off keeping. Determining credit cards to get rid of and which to keep can be tricky.
When trying to decide which credit cards to cancel, consider the following guidelines.
Close accounts on which you are delinquent or maxed out, and ask the creditors to identify them to credit reporting agencies as "closed by customer request."Otherwise, the credit card issuer might close them for you and add a negative notation to your credit record (see below).
If you close an account, the creditor might demand that you pay off the balance. If this happens, ask the card issuer to send you monthly statements allowing you to pay the balance off over time (and any interest and fees that accumulate on it) and suggest a reduced lump-sum payment or a payment plan you can afford.
Or contact the bank whose card you're keeping. Ask it to transfer the balance on the account you're closing to the account you're keeping. Keep the most current account open if you're delinquent on all your accounts.
If you pay your bill in full each month—that is, you don't carry a balance—close the accounts with the highest annual fees. Make sure that the accounts you keep open have a grace period in which you can pay off your bills and not incur any interest.
If you carry a balance, close the accounts with the highest interest rates, shortest grace periods, and least favorable balance computation method.
Check your credit agreement disclosures to see which method the company uses to calculate interest. Keep the cards that use the adjusted balance method, or if none do, your next best choice is to keep one that uses the average daily balance method, including your payments but not your purchases during the billing cycle.
If you sometimes need to pay at the last minute by phone, get rid of those accounts that charge extra if you talk to a customer service person to expedite payment. If you think you might make late payments now and then, get rid of cards with the highest late fees and penalty rates.
Also, cancel cards with "nuisance fees" like over-the-limit fees, inactivity fees, fees for carrying a balance under a certain amount, or a flat monthly fee that's a percentage of your credit limit).
Closing an unused credit card account might affect your credit scores.
Your credit scores might decrease if you close an account you haven't used and that has no, or only a small, outstanding balance. Why? Because closing that account increases the ratio of your overall debt to available credit. FICO recommends against closing unused credit card accounts if your purpose is to raise your FICO credit scores.
Also, if the account is old, closing it will decrease the average age of your credit history, which also lowers your credit scores. If you think closing a credit card will negatively impact your credit history (perhaps because it has no balance or a low balance, or you've had it a long time), and the card doesn't accumulate fees unless you use it, consider keeping the account open—just stop using the card regularly.
Creditors sometimes close unused accounts themselves. So, you might want to either (1) make a small purchase every few months and pay it off in the grace period or (2) if you don't use the card at all, close the account before the credit card company closes it. A notation in your credit report of "closed by consumer request" might be better than a notation that the creditor closed your account.
If you're receiving collection calls and demand letters from creditors, collection agencies, or debt buyers (or you're already being sued), consider talking to a debt settlement attorney to get advice about what to do in your particular circumstances.
And if you have a lot of debts, you might want to consider filing for bankruptcy. In that situation, you'll want to talk to a bankruptcy lawyer.