Canceling your credit card seems like a simple proposition: call up the credit card company responsible for your card and tell them that you want to close your account. But there are a few twists and turns as you cancel your card, which can damage your credit if you aren’t careful. Being aware of such issues — and hopefully taking care of them — can get you through closing a credit card with no problems.

Are You Really Ready to Cancel Your Card?

No matter how careful you are, canceling a credit card will cause a drop in your credit score: the score is based, in part, on the amount of credit you have available. With your account closed, you’ll simply have less credit available. That drop can be small and temporary — as long as you’re doing everything else right when it comes to your credit score — but it will show up if any one checks your credit. You may want to delay canceling your card if you’re expecting a credit check in the near future. If you’re applying for a mortgage or a car loan, wait to cancel your credit card until your funding goes through.

Eliminate Your Balance

If you’re still carrying a balance on your credit card when you cancel it, you’ll face a penalty on your credit score. Furthermore, depending on your credit card’s terms, you may be asked to pay your balance in full immediately upon cancellation — which just makes the cancellation process more complicated.

Instead, it’s worthwhile to pay off your balance before you even start thinking about canceling a card. Ideally, you can just pay off the balance entirely but transferring it to another line of credit may also be an option.

Close Your Account Completely

Rather than relying on a phone call to make sure your credit card is closed, you’ll want a little extra confirmation — considering the long list of potential problems, like identity theft or fees on accounts you thought were closed, it’s just a practical decision. To get that confirmation, take the following steps:

1. Call your credit card company and cancel the card over the phone. You may be directed to a retention specialist who will try to convince you to keep your account open.
2. Write a follow-up letter, informing the credit card company in writing that you are closing your account and requesting the company report that fact to the credit bureaus. In your letter, you need to include your name, account number, address and signature. Make two copies of the letter: file one and send the other by certified mail to the credit card company. That way, you’ll be able to prove that the company received your request to close your account.
3. Check your credit report. It can take about a month for an account closure to be reflected on your credit report, so wait thirty days before requesting a copy (you can get free copies of your credit report through Annual Credit Report.com). If there is a problem regarding your closed account, you’ll need to call the credit card company, as well as send another certified letter, to have them fix the mistake.

Popularity: 13% [?]

As credit card companies continue to cut credit limits, some account holders are winding up in an uncomfortable position. There have been plenty of reports of lenders reducing credit limits below your current balance. Smart Money reports:

Paul Pensabene of Saratoga Springs, N.Y., received a statement from HSBC on Dec. 8 that said he had a $359.99 balance and remaining available credit of $8,640. But when he went online to pay the bill several days later, his online account showed that same balance put him over his newly-reduced credit line of $300. And that didn’t include the $35 over-limit fee.

If you’ve been caught up in a similar situation, it’s unlikely that you’ll be able to get your credit limit raised back to previous levels. However, there are a few steps you can take to reduce the problems caused by a change in your limit.

1. Ask to have the initial fees dropped: If you’ve been a good customer, you can usually get your credit card company to drop the penalties triggered by a drop in your credit limit. However, if your balance remains over your new credit limit, you should be aware that future fees probably won’t be waived. You’ll need to call the credit card company, and you may need to be firm with the representative you speak to — remember, you aren’t at fault in this situation.
2. Decide what to do about your balance: You may not be able to pay off enough of your balance to bring it under your new credit limit before the end of the month (and your next bill). But that doesn’t mean you’re stuck with overage charges. Consider transferring part of your balance to another card, if you have to.
3. Set up balance alerts: Even if you can get your balance back under your credit limit in a hurry, it’s easy to forget about the change when you’re actually using your card. You can set up text message alerts for when you approach your new balance — many credit card companies provide this service, as do online money management applications like Mint.
4. Keep an eye on your credit: There’s no way for an abrupt drop in your credit limit to have a good impact on your credit score. In most cases, it will cause your score to drop. That means that you’ll not only have to be extra careful of potential dings to your credit in the future, but you’ll likely need to work on bringing your score up again. One of the simplest solutions in this sort of situation is to focus on paying down credit card balances as fast as possible.

At this point, it’s legal for credit card companies to reduce credit card limits to the point where the card holder is saddled with fees — with no advance notice. New rules take affect in July 2010 requiring lenders to give cardholders 45 days notice if a credit line reduction would trigger penalties. But that’s still far off: in the mean time, the only thing you can do is to try to protect yourself in the event of changes to your credit card.

Popularity: 13% [?]

It’s pretty normal to see people gearing up for some major spending around this time of year. In years past, that has translated in to some pretty heft credit card bills in January. But at least a few people are working on having a credit-card free Christmas.

Rising Interest Rates

Many credit card companies have higher interest rates than they did this time last year. While the possibility of using a credit card remains an option, it’s getting a lot more expensive. Even if you only wait until February to pay off the balance, you could be paying your credit card company quite a bit for the pleasure. Even the rewards that many cards offer don’t equal the cost unless you can pay off your balance in the month that you do your spending.

Tightening Belts

Even if your credit card’s terms haven’t changed recently, you may have noticed that a lot of people are tightening their belts for this year’s holidays. That doesn’t mean that we’re backing down on gift giving — most people will do everything they can to continue to give gifts even in an economic crunch. But there will be more handmade gifts this year, as well as careful shopping for sales.

A Holiday Without Cards?

There’s another card that will be making a reduced appearance this year: the gift card. Concerns about the stability of several major retailers makes a gift card a risky choice. Chances are increasing that recipients just won’t be able to use the full value of a gift card. The thought of using a credit card to purchase a gift card that won’t be used makes it an even more uncomfortable choice. If your goal is to help a friend or family member make a purchase, there is a far more stable option — cash.

Fewer Cards

According to eBillme (an online shopping option that allows users to pay cash), credit card use is dropping significantly this season:

Index results for the fourth quarter show that the credit crunch is causing shoppers to reduce their credit card usage and impacting consumer access to credit, resulting in a shift to cash alternatives.

It’s not necessarily a bad thing that we’re using our credit cards less, though. The average American household with at least one credit card has nearly $10,000 in credit card debt. The first step for any of us looking to reduce that debt is to put the credit cards away. It’s virtually impossible to pay off credit card debt when a person is still routinely using his or her credit cards for purchases — especially for a holiday gift shopping spree.

There are plenty of options for giving gifts that cost surprisingly little: we can give the gift of time or craft a gift for our loved ones. And if we do so, we get a gift of our own: the chance to avoid taking on credit card debt for the sake of the holidays.

Are you going to have a credit-card free holiday season?

Popularity: 14% [?]

Despite the bad news in the business section, many of us are still doing okay financially. It’s hard to tell if things are going to stay that way, so a lot of people are looking at ways to ensure that — if something does happen to them — they’ll still be okay. There are two pieces of advice in particular that seem to be going around: first, keep as much liquid cash as you can, or second, pay off as much debt as you can. The two tactics are mutually exclusive and it can be hard to decide whether these pieces of advice can really help you.

Your Mortgage

The liquidity argument pops up just about every time someone mentions a mortgage. In most situations, if you can pay your mortgage down ahead of time, it’s a good idea to do so. You cut the interest you’ll pay in the long run and you build a little extra equity. But in tough times, some people think that wisdom doesn’t hold true. The argument is that it’s better to keep those extra payments as cash and put them into savings — if something happens, you can’t just pull money back out of your mortgage, after all.

It’s a tough decision to make. Owing less money seems like a good idea, but if the future seems even a little bit shaky cash can be important. It would be nice to pay off the mortgage ahead of time, but for now, I’d make building up an emergency fund a higher priority. And as for all those suggestions to open HELOC and other lines of credit to have cash available ‘just in case,’ I think that may be one of the worst pieces of personal finance advice I’ve ever heard. Taking on debt on the off chance that you’ll have trouble paying a bill or two is just poor financial planning.

Your Credit Card

Liquidity is much less of an issue with a credit card. After all, if you can pay down your balance, you’ll have more credit available if you need it. I don’t like the idea of using a credit card as an emergency fund. Honestly, though, I can picture a lot of situations where it would be necessary. Depending on the interest rate on your balance, paying more than your required monthly payment can be a good bet: if you can improve your credit even a little bit, you may be able to get your credit card company to lower your interest rate. Paying down your balance can be worth the risk of not having a lot of cash on hand.

Looking Ahead

Right now, I’d recommend making an effort to eliminate consumer debt and build an emergency fund over paying off your mortgage early. Both approaches will put you on more steady financial ground if there are problems down the line, and provide a few more options for handling future expenses you might not be able to take care of otherwise. Paying more on your mortgage just doesn’t offer the same sort of security net.

Popularity: 51% [?]

It’s surprisingly easy to get a lower interest rate on your credit card. My husband had an American Express card with a fairly high interest rate and, last week, he decided to ask for a lower rate. Yep, all he had to do was ask and American Express gave him a better deal.

There were a few small complications in the matter: he had a credit card with rewards points and there simply wasn’t a lower interest rate that American Express could give him on that card. But the company was more than happy to switch my husband over to another card with a much lower interest rate if he was willing to give up his rewards points. He thought it over and, yes, it was definitely a better proposition.

Credit card companies don’t ever offer to lower your interest rate out of the blue. Even if you improve your credit significantly, they’ll leave your interest rate alone because they make more money if that interest rate is higher. But that doesn’t mean that American Express, Visa and all the rest aren’t willing to make you a better deal. You just have to step up and ask.

It is easier if you have a little bit of leverage, of course. The best leverage is being able to tell your card’s representative that you’ve been on time with every payment. Being able to tell your credit card company about a great deal you’ve just received from one of their competitors doesn’t hurt, either. If you’re considering taking your business elsewhere, most credit card companies will do what it takes to keep your account. Occasionally, they might call your bluff though — but there are plenty of offers out there with zero-interest transfers if you decide to go through with changing cards.

The important thing to do is call up your credit card company and ask. Ask for a lower interest rate, ask to have a fee refunded, ask for a better deal. After all, the worse they can do is say, ‘no.’ The best they can do is significantly reduce the money you’ll end up paying them. This tactic can be applied (with varying degrees of success) to other credit situations. Your mortgage lender may not be willing to negotiate on the amount you pay but if you’re having trouble, as so many people are, they might be able to find some sort of solution. But if you don’t ask, all you have to look forward to is struggling quietly; if you don’t talk to the representative in charge of your account, you can’t take advantage of policies that afford companies a little leniency when it comes to good customers.

Popularity: 46% [?]

Classic advice for handling any amount of debt — mortgages, credit cards, etc. — is to pay more each month than is actually required. For instance, if I had a monthly credit card bill of $100, but I had an outstanding balance of $10,000, with 10% interest, it would take me 213 months (or 17 years and 9 months to pay off that card). But if I could make payments of $200 each month, the length of time I’d be making payments drops to 65 months (or 5 years and 5 months), and if I could kick it up to $500, I would be out of debt in 22 months — less than 2 years. While the numbers for the credit card balance and payments are made up, the math isn’t. You can use BankRate’s credit card calculator to figure the numbers for your own situation.

A lot of people suggest handling a mortgage in exactly the same way. Any payment you make beyond your monthly required payment goes directly towards the principal amount of the mortgage — meaning that you’re not paying off extra interest, and will, in the long run, save you money.

But there are some drawbacks to prepaying a mortgage in this fashion, and even to paying off debt quickly, depending on your interest rates. There’s no question that you should at least make the minimum payments each month, but there may be ways to take better advantage of other money.

Do you have a 401(k)? Depending on the interest on your debt, you may actually come out ahead in the long run if you can invest your money in a retirement account. You’ll have to run the numbers for yourself, but if your employer matches the money you invest in your 401(k), there is almost no reason that should convince you to not invest up to the matching limit. While prepaying your mortgage can save you money on interest, your employer is essentially offering you free money that you cannot get any other way if one of your benefits is a 401(k) matching program! And who wants to turn down free money?

You might also decide against making extra payments on any debt if those extra payments could put you in danger of building up more debt. If you have no cushion of cash, no emergency savings, you can put yourself in danger of racking up more debt if something unexpected happens. Having the money to deal with emergencies should take precedence over paying off debt quickly. However, if you can place the money you were planning to direct towards your mortgage or credit cards into savings and build up a decent emergency fund, there is no reason that you can’t start up those extra payments after you’ve built up a healthy cushion.

Popularity: 26% [?]