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Most Canadians have likely considered cancelling a credit card at some point in time. Maybe you have too many and you need to take a few out of rotation or you’re trying to be proactive by limiting your ability to spend money you don’t have.
Whatever your reason, cancelling a credit card may seem like an easy solution, but it’s not as simple as it appears. Before you reach into your wallet and start cutting up cards, understand how cancelling a credit card can affect your credit score and why that matters.
What Factors Impact A Credit Score?
There are several factors that will impact your credit score when you choose to cancel a credit card. It’s wise to understand each one and its overall impact to determine if cancelling your card is the smartest choice.
Hard credit inquiries account for 10% of your overall credit score. A hard credit check occurs when you apply for a loan (car, home, personal, student, etc.) and authorization is required by a lender to see if you’re well suited for approval.
This type of credit check will show up in your credit report and will affect your score for up to 12 months but it could remain on your credit report for up to 3 years.
Your payment history accounts for 35% of your credit score which makes it a very important factor to consider. As it’s one of the strongest predictors that you’ll be able to meet your financial obligations, lenders like to see bills being paid on time.
If you’re notorious for missing payments or paying late, take some time to catch up and repair those bad habits before you apply for any new credit cards or loans.
One of the hardest-hit areas when you cancel a credit card is your credit utilization as it accounts for 30% of your overall score. Credit utilization is the amount of credit you’re using out of the total amount of credit that’s available to you. It’s considered good practice to keep your credit utilization under 30%, which means you’ll want to be using a maximum of 30% of your total credit at any given time.
If you use up too much of your available credit, potential lenders may see you as a risky borrower. They’ll worry that you’re spending beyond your means and as a result, may not be able to make regular payments.
Credit scoring models typically like to see a mix of credit accounts so your overall credit mix accounts for 10% of your overall credit score. A credit mix refers to what types of credit you have in your name.
It’s favourable to have a mix of credit cards, instalment loans, mortgages and store accounts. On the other hand, having too many can negatively impact your credit score.
Your credit history accounts for 15% of your credit score. It provides a variety of data such as how long you’ve had your credit accounts open, the age of your oldest open account and the average age of all your open accounts combined.
Open credit accounts get better with time. The longer you’ve had them open, the better off your credit score is.
What Factors Are Affected When Cancelling A Credit Card?
There are a few things you’ll want to consider before choosing to cancel a credit card as they’ll be impacted by your decision and could have lasting negative results.
Credit Utilization Rate
Cancelling a credit card decreases your overall credit limit so you have less credit to use overall. At quick glance, that seems like a good thing, but it’s actually not.
If the credit card isn’t costing you any yearly fees, you should avoid cancelling it. If you cancel it, it’ll remove that credit utilization from your overall amount. This could bring your usage to over 30% and negatively impact your credit score.
Reduction Of Credit History
Cancelling a credit card you’ve had for many years but don’t use much anymore may seem like a wise choice, but it’s often a mistake. Cancelling will bring down the average age of your open credit accounts and could negatively impact your credit score.
It’s also important to note that cancelled credit cards will stay on your account for 6 – 10 years so any lenders looking at your credit report will see this for quite some time after.
How To Minimize The Impact When Cancelling Your Credit Card
If you really need to cancel your credit card(s), there is a way to go about it from a strategic angle. These tips will help you cancel your credit card and minimize the damage to your credit score along the way:
Cancel Your Newest Credit Card
To maintain a strong credit history, don’t ever cancel your oldest card. Instead, opt to close the newest one you’ve opened if you’re looking to cut back on your number of cards overall. This will have the smallest impact on your credit history and credit score.
Don’t Cancel Multiple Cards At The Same Time
Choosing to cancel multiple cards at once is never advised as it could easily hurt your credit utilization ratio and can look very suspicious to lenders and credit reporting bureaus.
Upgrade To A Premium Rewards Card
If you want to cancel a card because it isn’t earning rewards or providing any value beyond the credit limit, consider contacting your credit card provider to ask about switching card types instead of outright cancelling the card. This process will allow you to transfer the credit limit and history to the new card which will help salvage your credit score.
Increase Credit Limit
If you’re wanting to cancel a credit card, try increasing your credit limit on your other cards first to help minimize the impact a cancelation will have on your credit utilization.
If you’re cancelling a card because you’re concerned about your spending habits, asking for a higher credit limit on your other cards may do more harm than good. Take this tip with a grain of salt.
Pay Off Current Balance First
If your card is still carrying a balance, you should never cancel it before you pay off that balance. If you’re stressed because of a big balance, cancelling it entirely is not the solution.
Your balance won’t go away when you cancel your card. The longer you wait to pay it, the more it’ll cost you in interest and the more it will negatively impact your credit score.
Consolidation means that your various debts (credit card bills, loan payments, etc.) are rolled into one monthly payment. If you have multiple credit card accounts or loans, consolidation may be a good way to simplify or lower payments. Consider pursuing consolidation if you have a few different debts to pay off.
Redeem Rewards and Points
Contact your card provider to find out how long you have to use the rewards or points attached to your card before you lose them. Some credit card companies will give you a grace period to use your points/rewards. Others will cancel them instantly when they cancel the card. Ask before cancelling to avoid losing out on rewards you earned.
Cancel Automatic Payments
Check that you don’t have any automatic payments set to come out of the card you’re cancelling. The last thing you want to do is close your card with no idea that you’ve got a balance building up.
Check That Your Card Is Actually Cancelled/Closed
Check your credit report after you’ve closed your card. This will allow you to have peace of mind that the credit card was indeed cancelled/closed, and it’s no longer part of your credit history.