A very common question that comes to mind is, “Does Canceling a Credit Card Hurt Credit Score“?
In this article, I will try to answer this question. But the summary is that canceling a credit card may hurt your credit score in a long run but generally, it will not. Keep reading this article to understand why and how.
Why is Credit Score Important?
The credit score is the number that is assigned by the credit reporting agencies to a consumer or cardholder. This score falls between 300 – 900; the higher your score is, the better it is for your profile.
If at any time in the future you decide to get a loan for purchasing a home or a car then lenders will measure your creditworthiness with your credit score.
A credit score is basically a parameter that tells lenders about your ability and responsibility for paying back the loan.
Averagely if your credit score is 600+ then you are standing in a good position where your chances to get a loan is quite bright.
Although each lender has its own credit score limits for approving a loan and credit score is just a factor in the whole process.
How Credit Score is Calculated?
Basically, ‘Credit’ is a source which you can use to get some money and pay for another thing while you don’t have your own money in your hand. You can use credit either paying for renovation expenses, loan consolidation etc. However, you promise to return the amount you have lent from someone at a future date with a value of interest included. A most popular form of getting credit includes Mortgages, lines of credit, credit cards, student loans etc.
The lender measures your ability to pay back the loan as you assert with a number of tools one of which is credit score. This score is calculated via a number of factors which includes;
- Payment History
- Number of Inquiries
- Types of credit
- Length of Credit History
- Usage of Available Credit
Does Cancelling a Credit Card Hurt Credit Score?
Closing your credit card can affect the credit score and your credit history. If we talk about credit history then closing the account will affect it, however, it depends on person to person what will be the impact.
Cancelling a credit card can hurt the length of your credit history, but even though you cancel the card your profile still show the credit history for next 7 years.
As a result, your oldest card will not impact your credit history immediately however it can give an impact over the long run. However, the impact will be minimized if you have some other credit cards which are also some years old.
If you have a credit card that is 15 years old and you are going to cancel that credit card. While on the other hand, you have a 2nd credit card which is 3 years old which you want to continue with.
If at any time in the future you want to check your credit history let’s say after 9 years in the future then you will hold a credit card that is 12-years old. But if you hadn’t canceled the 1st credit card then after 9 years you hold a card that is 24 years old and that’s better than the current situation.
So, now you can understand that canceling a credit card can hurt if you are picking up the oldest card to cancel. So, now it is clear that keeping your oldest card is worth it especially if it has no extra cost to keep it open.
What is Credit Utilization?
Now let’s take a look at Credit Utilization, it can immediately impact on the credit score when you decide to cancel.
Credit utilization is the second factor that answers the question Does Cancel a Credit Card Hurt? Credit utilization is a term which describes the way you ‘use the available credit’. If you want a good credit score, then it is more likely that you utilize a maximum of 35% of your available credit at a time.
Suppose that you have 2 credit cards, both have a credit limit of $7,000 and you have a payable balance of $2,500 in one card and $1,500 in another card. Now your credit utilization can be calculated as 28.6% ($4,000/$14,000). At this stage, if you are going to cancel one of credit card and making a balance transfer to the 2nd card. Then your credit utilization will rise to 57.1% ($4,000/$7,000) this is how cancelling a credit card can affect your credit score.
How to Avoid Effect on Credit Score While Cancelling Credit Card
You can avoid the credit score affect while cancelling credit card with these tips.
- Apply for a new card with the same credit limit while you are canceling a credit card.
- Another way to adjust the credit score if you are unable to apply for a new card is that, get increase your credit limit on the current card.
- One can also pay off the balance in full for the card which you are canceling to maintain a good credit score.
- However, in most situations, people do not want to lower the amount of credit which they hold.
Finally, if you have to decide to cancel a credit card, you can easily do that without hurting your credit score.
Your score will not drop dramatically if you are not missing any payments. That’s why making a habit to pay the bills on time to avoid penalties and making your credit scores strong.