Cancelling your Credit Card might hurt your Credit Score

Cancelling your credit card seems to be a good choice if you want to lower your use of credit card and thus lower your debt accumulation. Fewer credit cards also means you can manage your financial life easier. However, with fewer credit card, it is not necessary better than having more especially when it comes to your credit score.

Before I begin with how cancelling your credit card may affect your credit score, I will first begin with why we need to have good credit score. Credit score is a number representing the creditworthiness of a person which means the likelihood of the person in paying back a loan. When you want to take a loan either for a house, a car or anything else, bank will evaluate you based on your credit score. Thus, people with good credit score will have a better chance to get their application approved rather than people with bad credit score.

Utilization Ratio
This is one of the factor that affects your credit score. This is the percentage between the total amount of your debt and available credit. This means that when you cancel your credit card, your available credit will be lower but your debt will stay the same thus increasing your ratio.

For example, you have two credit cards, both with RM 5,000 credit limits. You have a RM 2,000 balance on one of the cards, or about 20% of your total available credit. If you cancel the second card, you will then be using 40% of your available credit. It will increase your utilization ratio and damage your credit score.

However, this won't hurt your credit score forever. As soon as you reduce your credit card balances (or increase your credit limits), your ratio will decrease and your credit score improve.

Sample Credit Card Cancellation Letter

Since our PM announced on the Service Tax of credit card in the Budget 2010. I believe most of us starts to cut on the number of their credit cards. Most of the bank requires you to write in an official letter in order to cancel your credit card. Calling the bank alone wont be enough. So I browse through the internet to look for some sample on the cancellationletter. Below are 2 samples I found on the internet.

Sample 1 (More Formal Approach)

[ Cancellation Letter Company]

[1234  Cancellation Street]
Cancellation City, Cancel 12345

Re: John Doe; Account No. 0987654321 (“My Account”)
Cancellation of Account

Dear Sir or Madam:

Please allow this  letter to serve as my request to immediately cancel my account with your company. I have included my check No. 1234 in the amount of $10.00 as full and final payment due on My Account. As a result, all of my obligations related to My Account have been satisfied and I expect that no future charges will be authorized on My Account. Immediately upon your receipt of this letter, please confirm the foregoing. Please be advised that in the event I do not hear from your company to the contrary within ten (10) days from your receipt of this letter, I will assume that the facts set forth in this letter are correct and will close my file accordingly.

Sincerely,

Signature Here____________________

Cancelling Member

Address of Cancelling Member

Phone Number of Cancelling Member

Account Number of Cancelling Member

Source:  Info Barrel
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Sample 2 (Simpler Approach)

[Your name]
[Your address]
[Date]

Dear Sir or Madam:

Please let this  letter serve as notice that I am terminating my credit card account effective immediately. Please close the following account:
Credit Card Company: ____________
Account Number: ________________

Please send me written confirmation that my account has been closed. Also, please confirm that you have notified all appropriate  credit card bureaus that this account was closed at my request.

Thank you for your prompt attention to this matter.

Sincerely,
[Your Signature]

Source:  Dolans.com