Cancelling your credit card is a big decision. Maybe you have too many cards already, or simply want to cut back on your shopping sprees. Whatever your reason, it’s vital to consider how the cancellation will affect your credit score.
What is a credit score?
Your credit score is a number assigned to you to determine if you’re creditworthy. It’s assigned by different agencies that report about credit cards. Usually, your credit score is a number between 300 and 900. It’s used by credit card companies and banks to weigh the risks of lending money.
Credit scores also help banks to avoid profit losses due to bad debts. Simply put, a credit score is used to decide if you’re qualified to receive a loan.
Why is my credit score important?
Having a good credit score means you are creditworthy. You have the capacity to pay on time, which means banks are more likely to allow you to apply for a loan.
However, if your credit score is low, it will be more difficult to access a loan for a car or house. Generally, 600 is an acceptable score, but to have your loan approved, your credit score must pass the lenders’ requirements.
How is my credit score calculated?
Credit is what you spend on a purchase when you don’t have the cash in your pocket. It’s given to you on the premise that you’ll pay it back by a certain date. The most common types of credit are credit cards, credit lines, loans, and mortgages.
Your credit score is highly dependent on how you use your credit. It’s calculated using the following criteria:
- Your payment history
- Usage of your available credit
- Length of your credit history
- Types of credit
- Number of inquiries
How does cancelling my credit card affect my credit score?
There are two examples of how cancellation can affect your credit score:
1. Think twice before cancelling your oldest card
If you’re planning to cancel your oldest credit card, this will affect your credit history. The account will show in your credit history, long after you’ve closed the account. In fact, it stays in your history for around seven years. This means that cancelling your oldest card may not have an immediate effect on your credit history. But, you’ll see the effects later, depending on how old your other cards are.
For example, you decide to cancel your ten-year-old credit card, but leave your two-year-old credit card open. After seven years, the cancelled card will be removed from your account, but you’ll still have a nine-year-old card, which is good. However, if you keep the older card instead of the new one, you’re left with a seventeen-year-old card, which is considerably better.
This means that cancelling your oldest card doesn’t really benefit you. If the two cards are almost the same age, the effect will be negligible.
And, don’t forget that keeping the oldest card active for your credit score will only be beneficial if it doesn’t have an annual fee.
2. Think about your credit utilization
Another factor immediately affecting your credit score when you cancel a credit card is credit utilization.
Credit utilization is the usage of your available credit. We recommend using 35% of your available credit to maintain your credit score.
For example, if you have two credit cards with the same credit limit of $10,000 and between the two cards, there is a $6,000 balance, your credit utilization is at 30%. If you make a balance transfer and process the cancellation of one of your cards, your credit utilization will rise to 60%. This is a good example of how credit card cancellation could affect your credit score…
To avoid this, you can cancel an existing card while applying for a new one with the exact same credit limit. You can also ask for a credit limit increase on an existing card. Bear in mind that you shouldn’t lower your current credit limit. And, remember that you must pay off your balance before you cancel a credit card.
Cancelling a credit card doesn’t always mean that your credit score will drastically lower. You can cancel a credit card and maintain your credit score if you know how.
Top tip: always pay your bills on time, even if it’s the minimum, because missing a payment will lower your credit score.
If you’ve decided to cancel a credit card, it’s worth taking some time to consider your options. Careful planning helps you to maintain a good credit score.