Food for thought on closing a credit card account

Have you ever tried to cancel a credit card? Maybe you weren't too pleased with the credit card issuer and wanted to voice your displeasure with the quality of the customer service. Perhaps you closed the account while bargain shopping for credit cards with cheaper rates or better rewards. Maybe you closed a credit card to remove all temptation of using plastic.

Or maybe you were like me. I had an American Express card that I had gotten nearly 5 years earlier. In truth, I never charged that much on the card because it forced me to pay the entire balance off each month (yes, I know this is a good thing). The problem is that I rarely used the credit card yet each spring rolled around and there was the $75 annual membership fee tacked on to the bill.

About a year ago, I decided that my well-used, membership fee-free Visa was enough for all of my needs and decided to call and cancel the American Express card. What ensued was a good 15 to 20 minutes of telephone hard sell from a customer service rep who wanted to know why I was canceling the card after being a good customer for so long. My explanations about not wanting to pay for something that I wasn't using apparently weren't good enough because the rep kept at me, offering a lower member ship fee and subscription to another one of their products. I politely declined and still she persisted.

'Cheaper to keep her' (I mean, me)?
Looking back I can see why they were trying to so hard to keep me. No doubt the cost of signing up a new creditworthy customer is far greater than retaining a good bill-paying patron -- even if they use the credit card on rare occasions. (R&B fans of '60s soul singer Johnnie Taylor may recognize the reference to his hit: "Cheaper to Keep Her.")

Of course, I canceled the card long before the subprime mortgage market meltdown and the start of our current economic rollercoaster ride. Things are different now and I might have held on to the card if I knew then what I know now. Namely, getting credit, even for those with good FICO scores, has gotten considerably harder.

Cancellations decline
That could explain the results of a recent study from the Auriemma Consulting Group, a market research firm that publishes the Cardbeat report. They found a slight decrease in credit card cancellations among consumers. The report asked consumers if they were likely to cancel a credit card within the next year. Only 11 percent said they planned to cancel -- that's down slightly from the 15 percent who indicated in 2006 that they had in fact canceled cards in the previous year.

Just as in my case, the primary reason cardholders gave for canceling was the card was unused. Like me, many of the consumers canceled credit cards because they had other cards that they used more often. Seventeen percent of those surveyed say they had never even used the credit cards they were canceling and another 26 percent had used the cards very rarely.

Why the slowdown in cancellations? "We believe that savvy consumers are hesitant to cancel their existing cards in fear that they may not be able to find a more compelling substitute, should they need additional credit in the future," Cardbeat managing editor Megan Bramlette says in a press release.

When I closed my American Express credit card I also had no thought about how the action might affect my credit score. I wasn't applying for any new loans or mortgage and had no immediate plans to do so. And it's probably a good thing I wasn't.

To close or not to close an account
Craig Watts, public affairs specialist for Fair Isaac Corp., the creator of the FICO credit scoring model, suggests consumers should think before closing a credit card account.

"If you close credit cards, you're never going to help your credit score and in some cases you may hurt your score," Watts says. "It would be unlikely that you would hurt your score a lot, but that's always possible."

Closing an account affects two of the five components that contribute to your overall FICO score. Nearly a third of the score -- 30 percent -- is based on what's called a credit utilization rate. Add up the total that you owe for all of your credit cards (your outstanding debt) and divide that by the total of the available credit on all of the cards. The utilization rate tells how much of your available credit you are using. People with a high utilization rate may be deemed greater credit risks. Closing one of your credit cards can increase the utilization rate and lower the FICO score, says Watts.

Another portion of the FICO score (representing 15 percent of the total) assesses the length of your credit history. So closing a card you've had for a long time, shortens the average length of credit history -- and may result in a lower FICO rating.

"Our advice to consumers who are concerned about this question is if you are planning to apply for a major loan in the near future -- for a car, mortgage, student loan or refrigerator -- don't close credit card accounts thinking that that's going to help your credit rating or help you qualify for a better credit rating," Watts says.

He adds: "If you are not planning to apply for a loan, then close the credit card."

See related article: "How to cancel a credit card"