Does Cancelling A Credit Card Affect Your Credit Rating?

Your credit score is a rating that determines your creditworthiness to lenders. It’s affected by all types of financial products, such as credit cards, car leases, personal loans, mortgages, payday loans and retail debt.

The decisions you make relating to the credit you take on affect your financial opportunities, both positively and negatively, so applying for and using a credit card will impact your rating, as will closing a credit card.

Common ways cancelling a credit card may impact your credit rating

The number of credit accounts will decrease. The number of credit accounts you can manage is a factor in your credit rating, and being able to handle many accounts responsibly is usually a good thing. Cancelling a card will reduce the number of accounts you have open.
Your credit utilisation ratio will increase. Lenders consider your credit utilisation ratio — the amount of credit you’re using divided by the total amount of credit you have available — and a higher percentage can lower your score. Cancelling a credit card will reduce your available credit, increasing your credit utilisation ratio.
The average age of your accounts will decrease. Lenders like to see that you have a history of responsible credit use, and maintaining open credit accounts for a long time generally demonstrates your ability to do so. Cancelling a card may reduce the average age of your accounts, which can significantly impact those with a limited credit history record.

Your overall credit history, the amount of credit you’re using and the age of your other credit accounts will impact how much these factors affect your credit score. Generally, cancelling a credit card will significantly influence your credit score if you have a short credit history or use a high percentage of your available credit.

Benefit from good behaviour through Comprehensive Credit Reporting

Your credit report rewards good behaviour as part of Australia’s ‘positive’ reporting scheme. Comprehensive Credit Reporting (CCR) shows positive data such as repayment history, the types of credit accounts you opened, the lenders you hold credit with, how long you’ve maintained accounts and the credit limits.

If you make repayments by the due date, limit applications for unsecured credit and use reputable lenders, you’ll see a boost to your credit score. But you’ll be penalised if you miss payment deadlines and regularly apply for credit.

» MORE: 12 Questions About Credit Scores and Reports

When cancelling a credit card may hurt your rating

You’ve paid off the balance, and there are no reports of negative payment history. Generally, leaving a credit card open with a zero balance is better than closing it.
You have no other forms of debt and, therefore, no future credit history.
You can handle the card along with other credit types (car loans or a mortgage).
You’ve had the card for years. Banks look favourably on a long history with products.
You want to access rewards points.

When cancelling a credit card may not affect your rating

You’re missing repayment dates and accumulating debt, which already adds negative markers to your credit history. Just make sure to pay off the card’s balance before you cancel.
You already have at least one other credit card.
You don’t like the credit card’s features, such as higher interest rates and fees, and want to switch to a different card.
You’ve only had the card briefly, and it has a low credit limit.
You can increase your credit limit on other cards, which may diminish the impact on your credit utilisation ratio.

The key is maintaining credit activity, but only what you can handle, and ideally, avoiding all interest. Only buy items on your credit card that you can afford with your debit card.

Pay it off before it incurs interest, and use the credit product to build up rewards points. If you’d rather pay for everything with your own money and aren’t interested in rewards, cancelling the credit card might be your best option — for now.

No decision is final, and you can track how your credit score is performing without a credit card. If and when you need to improve your score, you can always open a new credit card account that you can comfortably manage.

» MORE: 9 Things to Know Before Getting Your First Credit Card

Other factors to consider before closing a credit card

A lot goes into the decision to close a credit card account. As with all things financial, it’s wise to think long term about how it will affect your life. Check your credit score so you understand what the banks see so you can plan accordingly.

Your credit history

If you have a short or limited credit history, cancelling a credit card will reduce the number and average age of your accounts, which is a factor in your credit score. If you aren’t able to switch to something with better terms right now, you could keep the current card active and pay it off every month to help build your credit score. A better credit rating could eventually make you eligible for a new credit card that offers rewards and specific perks.

The specific card you want to cancel

Different types of credit cards will have different levels of impact on your credit score. For example, a low-limit credit card with a long history and no late payments are less likely to hurt your credit than a high-limit credit card with a short history and a few late payments.

When assessing the potential consequences of cancellation, consider the type of card, how long you’ve had it and how it compares to other accounts in your credit mix.

Recent applications

Equifax, one of the 3 main credit reporting bureaus, considers credit enquiries and applications as one of the most vital elements in your credit score — that aspect alone represents around 40% of your total rating. So, use that information wisely.

If you recently applied for a new credit card or loan — or plan to soon — take the necessary steps to mitigate any potential damage to your score. That probably means holding on to that credit card, even if you don’t use it.

Stress and temptation

Closing your credit card may have disadvantages, but cancelling is always the best option if it’s causing you stress. Don’t ignore how the card makes you feel just to avoid a potential drop in your score. The goal of managing your personal finances is to empower your life, so if a credit card is causing you more harm than good, cancel it.

Keep the card open if you cannot manage the repayments with other financial responsibilities. You can work on your repayment history or keep the account open and avoid using the card because simply having a credit card can help to improve your credit score.

Ability to renegotiate interest rates

Holding on to the credit card might be helpful if you want to renegotiate a loan in the next 12 months. Use it strategically to increase your score and avoid any new credit applications.

Future opportunities

Think about the financial moves you hope to make in the future. For example, maybe you’ve always wanted to start your own business, but the timing hasn’t been right. Or, you plan on applying for a home loan or making another major purchase next year and want to keep your credit card open to build up your credit history.

While finances are extremely important and should be prioritised, so should your happiness and satisfaction. Time, unlike money, isn’t renewable.

Ultimately, the decision of whether or not to cancel a credit card is a personal one. You’ll need to weigh the potential impact on your credit score against the reasons for cancelling and decide what’s best for your situation.

Are you planning to apply for multiple cards to access more credit? Do you want to be credit-free and only use your debit card? Will you have other loans, short-term and long-term? What is your most recent credit report saying?

Credit ratings have plenty of nuances, so don’t rush any decisions. Go through your credit report, and if you’re changing your finance products, do it at least 6 months before a big purchase, such as a house. That time will allow your credit score to recover if it temporarily falls.