How difficult is it to cancel credit cards? Why?

It could be a crippling amount of debt, the spate of online security breaches (the Sony PlayStation Network and Australian retailer Lush, to name the most recent), or just a newfound sense of responsibility. Whatever it is, you’re set on cancelling your credit card. In the old days, throwing it in the shredder did the job. Nowadays, it’s seldom that easy—just ask the 21% of the population found by the Veda Advantage Australian Debt Survey to be struggling with their debt.

The psychology of credit cards

Cancelling a credit card is a lot like starting a new workout: getting up and doing it is the hardest part. The act itself is easy, but having less credit at your disposal takes some getting used to. A study by MIT business professors Drazen Prelec and Duncan Simester showed that people spent more when buying with credit cards than with cash, even for the same items. It’s this feeling of power that we don’t want to lose—carrying cash around limits what we can buy and exposes us to other dangers (e.g. credit cards can be replaced, but lost cash is simply lost). Most of us would rather keep the status quo, even if it means holding on to a few bad habits.

Your bank wants you back

Credit card companies want your business (read: your interest payments), so they’ll try to keep you on board even if you’ve been delinquent. Even after you’ve closed the account, credit card offers are likely to show up at your doorstep. That’s how many people fall into the trap. Ben Popken, managing editor at Consumerist.com, suggests—by means of a “breakup letter” to his bank—that you look at the long-term costs of a credit card offer, such as the 20% interest, before falling for the immediate perks, such as the 0% honeymoon rate.

Pick up the phone

No one likes to call customer service, and banks have a particularly bad reputation. But that’s an important first step to cancelling your account, according to the Financial Consumer Agency of Canada. Some accounts remain active even after years of non-use, and some pre-authorized charges, such as subscriptions or gym memberships, may keep appearing even after you’ve closed. During the call, the agent may try to convince you to keep your account or make you an offer you’ll find hard to resist, but stay firm and say no—with any luck, they’ll stop trying after a while and let the transaction through.

Pay off your balance

Make sure to pay your balance off in full before calling to cancel, as even a few dollars of debt can greatly complicate the process, says Bankrate.com. If you let your bank know you’re planning on closing your account while you still have debt, they’re likely to raise the interest on your remaining balance to make the most they can out of you before you go. Avoid further problems by making sure none of your monthly bills are charged to your card.

Cutting up your card

There’s something to be said about cutting up that slab of plastic; some compare the feeling to punching your grade-school bully in the face. But neither is a good idea. Credit cards can still travel from the trash bin to a fraudster’s hands, and it doesn’t take much to put the two pieces back together and get your bank information. Instead of cutting down the middle, cut through all the parts that make the card usable, MSN Money advises. Cut through your numbers (make sure even the world’s most patient thief can’t put it back together), your name, your signature, the magnetic stripe, the security chip. If possible, don’t put them in the same bag—throw them out on different days.

When to think twice

In some cases, holding on to your credit card makes more sense. One of the most common reasons is your credit utilization ratio, one of the main elements of your credit score, according to Investopedia. This is the ratio of your total available credit limit to the credit you’re actually using; the lower it is, the better your score will be. If all your credit cards combined have a limit of $5,000, of which you use $2,500, your credit utilization ratio is 50%. But if you cancel a card with a $1,000 credit limit, the ratio becomes $2,500 out of $4,000, or 62.5%—and your score will drop accordingly.

You may also want to keep your credit card if it’s one of the oldest in your collection. Credit bureaus prefer a longer credit history, so if cancelling the card cuts your record by five years, your credit score may suffer.

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