It does not matter if you have too much and want to reduce it, or if you want to limit your chances of spending too much, we probably all find ourselves in a situation where we wonder if we should cancel a credit card or not. Before you jump the rifle, you should consider how it might affect your credit rating – because it will affect it, not in a positive way.
How is your credit score calculated?
First, let’s review how the credit score is calculated. Remember that “credit” is a tool that you can use to pay for something without physically having the money, with the promise that you will repay it. Typical forms of credit include: credit cards, lines of credit, mortgages, student loans, etc. The way you use your credit is what will determine your credit rating.
The two credit reporting agencies in Canada – Equifax and TransUnion – do not reveal exactly how the credit rating is calculated, but here’s what we’re sure is included:
- Payment history
- Use of available credit *
- Duration of credit history **
- Types of credit
- Number of requests
How to cancel a credit card hurts your credit rating
If you are considering canceling a credit card (closing the account), there are two ways in which this action could affect your credit history and credit rating. First, if it is your oldest card, closing the account will affect the duration of your credit history **. However, even after canceling a credit card, the account will be present on your credit history for approximately ten years. Cancel your oldest credit card account would not have an immediate effect on the duration of your credit history as a result. The effect that will be present at the end of the line, however, will depend on the age of your other credit cards.
For example, if you cancel a 10-year credit card and leave a 2-year credit card, after 10 years, when the card you canceled is removed from your credit history, you will have a credit card. 12 years – and that’s very good. But if you did not cancel your credit card 10 years later, you’d have a 20-year credit card – and that’s even better. In this case, canceling your older credit card could have a negative impact on your credit rating, which may make it worthwhile to keep the oldest account open. If your two credit cards were almost the same age, then the effect would be minimal.
The use of your credit (use of available credit *) is a factor that can cause a negative impact on your credit rating when you cancel a credit card. To maintain a good credit rating, it is prudent to use a maximum of 35% of your available credit at any time. For example, if you had two credit cards, both with a balance of $ 6,000, then your credit usage should be 30% ($ 6,000 / $ 20,000). If you decide to make a balance transfer and cancel one of your credit cards, your credit usage would increase to 60% ($ 6,000 / $ 10,000); this is the main way by which canceling a credit card affects your credit rating.
One way to avoid this is to cancel a credit card while you apply for a new credit card with the same limit, or by getting an increase in your credit limit on your current card. But what’s important to keep in mind is that in most situations you do not want to reduce the amount of credit you currently have . Also remember that it is important to pay off the full balance due on your scale before attempting to cancel the card.
Finally, if you want to cancel a credit card, you are able to do it without lowering your credit rating dramatically. Keep the above mentioned factors in mind when making your decisions regarding your credit, and there should be almost no effect on your credit rating.