If your wallet is overflowing with credit cards, you may feel the urge to declutter your collection and close out unused credit accounts. Or perhaps you see cancelling a credit card as a move to curb overspending. Whatever your reasons, you may want to think twice about ending the credit card relationship, as cancelling a credit card could impact your credit score.
Keep on reading to learn how closing a credit card affects your credit score so you can approach the situation with financial savviness.
The short answer is yes, cancelling your credit card may have a negative impact on your credit score.1, 4 However, there are factors to consider like how much it will be affected and is there a good way of going about closing a credit card?
Pulling the plug on a credit card can affect two important factors used to calculate your credit profile:
- your credit history
- and credit utilization ratio.
Combined, these two factors can make up almost half (45%) of your credit score.
In general, credit scoring models reward you for long-standing credit accounts and only use a small percentage (less than 30%) of your credit limit.1 So if you cancel a credit card (especially one you've had for a while), it could reduce the average age of your accounts and affect the amount of available credit you are using — triggering your credit rating to drop.
There's no definitive, one-size-fits-all figure. Ultimately, the impact of cancelling a credit card largely depends on your credit situation and the credit scoring model that's used.2 For instance, if you have a good credit score, closing a credit card might not have a huge or long-lasting impact on your rating.3
But here's the good news: Even if your credit score drops after closing a credit card, it will typically recover within a few months if you continue to make your payments on time and use credit responsibly.4
To understand what happens after you close a credit card, you need to understand what affects your credit score. Some of the primary factors that play into calculating your credit rating include:5
- Your payment history (do you pay your bills/debts on time?)
- Your credit utilization ratio (or used vs. your available credit)
- The length of your credit history
- Public records
- Number of inquiries into your credit file
If you close a credit card, it can change the way your credit score is calculated in two major ways. Specifically, cancelling a credit card can shorten the length of your credit history and increase your credit utilization ratio (meaning you use a bigger chunk of your available credit limit), which can impact your credit rating. Here's a breakdown of why and how that works.
Your credit history
Cancelling a credit card can impact the length of your credit history, which is the part of your credit report that shows how long your credit accounts — credit cards, student loans, mortgage, car loans and the like — have been in existence.6
When calculating your credit rating, credit scoring models look at how long your oldest accounts and most recent accounts have been open. Specifically, credit history is based on the average age of your credit accounts. So, the longer you hold credit accounts open, the higher your average age will be.
Since credit history generally makes up 15% of your total credit score calculation,7 closing a credit card account can lead to a change in your score — and in some cases for the worse. With one less account on your file, it can shrink the average age of your credit accounts, causing your rating to drop.8
Lenders typically like to see that you can responsibly handle credit accounts for the long haul. If you have no or very little credit history, you may struggle to get approved for a credit card, loan or mortgage. That's why using a credit card responsibly can be a great tool to help build up your credit history.
Your credit utilization ratio (or used credit vs. available credit)
Let's say you charge $4,000 between three credit cards and have a total credit limit of $20,000. In that case, your utilization ratio across all your cards is 20% ($4,000 divided by $20,000 = 20%.)
But let's say you cancel one of your three credit cards. There are now fewer credit accounts and less available credit, thereby boosting your credit card utilization ratio. If you charge $4,000 between two credit cards and have a total credit limit of $10,000, your credit utilization ratio would now be 40% ($4,000 divided by $10,000 = 40%, which is above the desired 30%). That one cancelled card makes a difference! *
*This example is for illustrative purposes only.
Also, consider the credit limit on the card before you cancel it. If you look at the example above, a credit card with a $10,000 credit limit will have a bigger impact on your credit utilization ratio. Whereas one with a $500 credit limit will make less of a difference. If you're decluttering credit cards from your wallet, you may want to choose the one with the lowest credit limit.
If you're using the credit card responsibly and it has no annual fee, you may want to just tuck it back into your wallet and leave it open. Since it's not costing you anything, it can benefit you to keep the account open. You can use it as a tool to build a longer credit history and minimize your credit utilization ratio. However, just bear in mind that the issuer might close the account if you don't use it for a long time, which can ultimately impact your credit score.17
But if you're paying a fee for a credit card you don't use or you're unhappy with, cancelling the card might make sense and can be done in a way to initially minimize the impact on your score. If you're looking to curb overspending, it might also make sense for you to cut down on the number of credit cards in your wallet.
Plus, your credit score will typically rebound after closing a credit card. Just keep using your credit responsibly and your credit score will likely eventually recover.
What to consider when deciding to close or keep a credit card
Before you get busy closing credit cards, consider the following potential advantages and disadvantages of closing a credit card account. Whether you decide to close your card or not, ensure you evaluate your options and are informed about the pros and cons.
|• Fewer credit accounts to track. If a credit card does not spark joy, it might make sense to cancel it. That way, you can cut down on the number of credit accounts you monitor and manage.||• Your credit score may drop. Cancelling a credit card may mess around with the formula used to calculate your credit score. Such a move can shorten the length of your credit history and increase your credit utilization ratio (above 30%). As a result, your credit rating may drop.|
|• Saves money. If you pay an annual fee, cancelling a card can help cut costs. Also, if you're looking to keep debt under control, one less card in your wallet may help you avoid the temptation to overspend.||• Could affect credit approvals. After cancelling a credit card, it can take some time for your credit score to rebound. Depending on your credit situation, it could affect your ability to get approved for other credit products, such as a mortgage, car loan, or another credit card.|
Things to consider when closing a credit card
|• Helps maintain your credit utilization ratio. Since credit utilization ratio accounts for roughly 30% of your credit score calculation, keeping a credit card open can help you maintain and even boost your credit score.||• Might impact future credit applications. You may have to pay an annual fee to keep a credit card open. And, in some cases, keeping a lot of unused credit cards open might impact new credit applications.|
|• Helps build credit history. Keeping a credit card open can help build your credit history and prove to a credit card issuer that you're a responsible credit card user.||• Adds to your money management workload. If you keep a credit card open, it's one additional account that you'll have to track. That means reviewing account statements every month and ensuring you make payments on time.|
|• Helps build or maintain a good credit score. If you're using the credit card responsibly and it has no annual fee, you may want to leave the account open and use the card to build or maintain a good credit score.||• Unused credit cards may be declared inactive. If you have a credit card with a zero total balance that you don't use over a certain time, the credit card issuer may declare it inactive and close the account. Also, if the credit card expires, make sure to destroy the old one and reactivate the new card when it comes in the mail.16|
If you've decided to say goodbye to a credit card, below are some tips for safely closing the account. Before you begin, however, remember to choose widely which credit card to cancel. Cancelling a credit card that you've recently opened will have less of a negative impact on your credit score than closing an older account.15 So if you must cancel a card, you may want to first go with the account that was opened most recently. But a general guideline is to keep a new credit card open for a few months before cancelling it.
- After you cancel the card, get written confirmation of the cancellation. If you ever have to dispute your credit history entries, having this proof will come in handy.
- Check your credit reports to ensure that the information has been reported correctly to the credit reporting agency.
- You can get your free credit score check online via the Credit View service available through your Scotiabank mobile app. This Credit View feature is powered by TransUnion, so you're getting your credit score directly from one of Canada's leading credit bureaus.
- After cancelling your credit card, do everything you can to stay in good standing: make payments regularly and on time to all your other credit accounts.
- Your credit score will gradually recover if you continue to use credit responsibly.13
- However, it may take some time, so you may want to avoid taking on any new debt, like a mortgage or car loan, until your score rebounds.14
Cancelling a credit card may seem like no big deal, but it could have an impact on your overall credit score. So, whether you choose to close an old card, or keep it in your wallet longer, if you've done your research and are aware of the pros and cons of either of those choices, you're in a good place.
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