Canceling a Credit Card, is it Bad For Your Credit Score?

Canceling a Credit Card, is it Bad For Your Credit Score?

Written by Caitlin Wood
Last Updated November 10, 2016

To cancel a credit card or not, this is probably one of the most asked credit and personal finance questions out there. Everyone wants to know should they cancel a credit card that they’re no longer using or keep it open and use pure force of will to simply not charge anything new to it?

The thing is the answer is both yes you should cancel your credit card and no you should not cancel it. It depends on a lot of factors like your goals, your credit history, your credit score, and your spending habits. Here’s the main issue, canceling a credit card doesn’t happen in a vacuum, it will affect your credit score which means other aspects of your financial life will also be affected.

There are many valid reasons for why you may want to cancel a credit card, including but not limited to wanting to cut back on the number of credit cards you have, trying to rely less on credit, or finding a card that better suits your needs. Whatever your reason is, consider the following factors before you cancel any of your credit cards.

Your Credit History and The Age of Your Accounts

You build a credit history when you use a credit card; all your actions, payments, and even mistakes are recorded on your credit report (learn how to read your credit report here). Your credit history is very important as it provides future creditors and lenders with information about your credit habits and is used to calculate your credit score.

credit score

Click here to learn more about how your credit score is calculated.

What you need to make sure you consider before you cancel a credit card is whether or not it will negatively affect your credit history and therefore credit score. If you want to cancel one or several credit cards because you have too many, cancel the newest ones. Always try to hold onto the card that you’ve been using for the longest. Canceling your oldest credit card won’t necessarily hurt your credit score right away as an account stays visible on your credit report for up to 10 years (more about how long credit information stays on your credit report here). But in 10 years when that card you canceled no longer affects your credit history, you might regret it, especially when you consider that that account could be 10 plus years old.

We just want to add that, we understand 10 years seems like a long time and that it seems like the one credit card you cancel 10 years ago won’t matter anymore, but just keep in mind that credit building is a long term commitment. You absolutely need to think about the future when considering your credit health.

Points and Fees

Is the card you want to cancel costing you money? Or, are you accumulating points that are actually useful to you? These are questions you need to consider carefully when deciding if you want to cancel a credit card. If you have a rewards credit card with a serious yearly fee, ask yourself if those points are worth the cost.

Finally, if you do decide to cancel a rewards credit card make sure you use up the points or find out what will happen to them when you cancel. You might not want to waste all the points you’ve accumulated just to cancel a credit card.

Looking for more information on rewards credit cards? Read this article.

Your Utilization Ratio

Your credit utilization ratio is the factor that you need to pay the most attention to as it will have a direct and immediate affect on your credit score should you decide to cancel one or more credit cards. Your credit utilization ratio is the amount of available credit you have to use compared to the amount you’re actually using; you can calculate it by dividing your current credit card balances by your total credit card limits. As a rule of thumb, you should always make sure your credit utilization ratio is 30% or less.

For example, say you have 3 credit cards and each has a $5,000 limit which means your total credit limit is $15,000. Across these 3 cards, you currently carry balances that equal $4000. This means your credit utilization ratio is 26% (4000/15000). But, if you cancel one of your credit cards your total available limit would be $10,000 and your new credit utilization ratio would be 40%, which is too high.

Credit utilization or your total debt level is one of the five main factors that directly affect the calculation of your credit score. If your credit utilization ratio is too high, your credit score will be negatively affected. Furthermore, potential lenders do not like credit utilization ratios that are too high; it shows them that you might have a debt problem.

This is why it’s so important that you consider this before you cancel a credit card, especially if you’re looking to apply for a mortgage or loan in the near future. A low credit score and a high credit utilization ratio could potentially prevent you from getting approved.

What is bad credit and how do you fix it? Read here.

Your Card’s Balance

This factor is definitely less important than your credit utilization but it’s still something that you need to consider and deal with. If you decide to cancel a credit card, you need to make sure that you have paid off any balance that it might have had. The reason you need to double check is because your credit card provider will allow you to cancel a card even if it has a balance. Leaving behind an unpaid balance or interest charges could seriously affect the health of your credit.

Making the Right Choice for Your Situation

Your credit score is very important, but it’s not as important as being debt free or having a good handle on your finances (which is more important to you? Click here). If having too many active credit cards is negatively affecting your life or debt levels then we think it’s always in your best interest to put those things above your credit score. But we also think you need to look at the bigger picture, especially if you see a mortgage or loan in your future.

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Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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