Does Cancelling a Credit Card Affect Your Credit Score?

If you are considering cancelling one of your credit cards, the effects that cancelled credit card can have on your credit score may surprise you. If you are not carrying a balance on the card, then closing out the account may seem like the most logical thing for you to do. Cancelling the card can seem like a good option because you do not really see a need for the line of credit available on the card, or because you may see it as temptation just waiting for you to go on a shopping spree or exotic vacation.

In some instances, you may just want to replace that paid off card with a better alternative, such as one with a lower interest rate, no annual fee or a cash back rewards program. While each of these are good reasons for eliminating that card from your wallet and your life, doing so could end up having potentially adverse effects on your credit score. And if your credit score is not the best to begin with, the consequences have the possibility to be financially devastating.

Understanding What Affects Your Credit Score

A variety of factors come together to influence your credit score, with payment history being the defining factor among them. Other factors that come into play include the number of recent credit inquires showing on your credit report, your number of open credit accounts, the number of credit accounts that have been opened just recently and the type of credit accounts that you have open at the moment. Your debt to credit ratio, which is the outstanding balance amount compared to your total amount of issued credit, is also a very important factor used in determining your credit score.

What Happens to Your Score When You Cancel a Credit Card?

Cancelling a credit card may seem like no big deal since it is just a simple phone call, but it actually has a profound effect on your credit score. This is because it impacts three different factors that are used to determine your credit score.

The first thing that a cancelled credit card impacts on your credit profile is your credit utilization, which is the same as your debt to credit ratio. By cancelling the card, you effectively lower your amount of extended credit which can result in a higher debt to credit ratio if you are carrying any debt balances at all on your other accounts. The credit bureaus do not give an ideal credit utilization ratio for borrowers to target, but the recommendation is to keep that ratio as low as possible. There is a proven direct correlation between low credit utilization and a high credit score. This means that keeping the paid off card active is a good financial move as it keeps your credit utilization lower due to having more available credit on the credit profile.

Cancelling the credit card can also have a negative effect if the card has a lengthy account history. Since length of credit history is one of the things that determines your credit score, cancelling a card that you have had open for a long period of time can actually shorten your credit history. This is especially true if the card is your oldest credit card on record. Credit bureaus also do an average account age for all of your credit accounts, so even if this card is not your oldest it can still result in a lowered credit score if it is one of the older accounts currently listed on your credit report.

If the card you are considering cancelling is your only credit card, then it can lower your credit score simply because you will no longer have debt account variety on your credit report. One of the characteristics of a good credit score is a healthy mix of the various debt account types. This includes mortgage loans, credit cards, store credit cards, auto loans and personal loans. Less variety in the account types on your credit report can actually lower your credit score.

The amount that your credit score will go down due to a cancelled credit card varies as it depends on all of the factors listed above. If your credit score is high to begin with, then the lowering you will experience may not actually have that much of an impact on your financial situation. However, the same is not true if your score is not very high. It is important to remember that a low credit score can have negative effects in many areas of your life. This includes everything from paying more for car insurance and loans to potentially not being able to qualify for a new apartment or job.

A Final Thought on Cancelling a Credit Card

While there can be negative consequences as a result of cancelling a credit card, it is important to consider the advantages as well as the disadvantages of doing so. Here at PaydayLoansCashAdvance we just want you to make the best informed decision for you and your personal financial situation. If you know that carrying around a credit card with no balance can prove to be a temptation that you simply cannot avoid, then it may be in your best interest to take the hit on your credit score instead of accruing new debt. In such an instance, the benefit of avoiding new debt can outweigh the benefit of maintaining a good credit score by keeping the credit card account open.

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