Does Cancelling a Credit Card Affect Your Credit?
Mar 08, 2021 • 10 min read
If you’ve been considering giving your wallet a good spring cleaning, think twice before you cancel any unused credit cards. Cancelling a credit card can negatively impact your credit score. Cancelling a credit card increases your credit utilization and shortens your overall credit history, which are both key factors that impact your credit score. As a result, your credit score could take a noticeable hit if you decide to cancel a credit card.
I learned this the hard way when I cancelled a little-used credit card that I had since university. It was the very first credit card I opened, and it was a standard card with no additional fees. On the other hand, it didn’t provide me any travel or cash back rewards, and I felt like I was juggling too many credit cards. So I figured it was time to grab the scissors and cut up the card.
Big mistake. I only realized a couple of months later that my credit score had dropped substantially. The noticeable decrease in my credit score was due to the hits my credit utilization rate and credit history took when I cancelled my credit card.
Learn from my mistake and read on to understand why cancelling a credit card can negatively affect your credit score.
Why Does Cancelling a Credit Card Impact my Credit?
To answer this question, we need to first have a solid understanding of how credit scores are calculated. The main factors used to calculate credit scores are:
Of the five factors above, there are two that are impacted the most when you cancel a credit card: your credit utilization and your credit history. Here’s why and how they each affect your credit score when you cancel a credit card
Cancelling a Credit Card Increases your Credit Utilization Rate
Cancelling a credit card decreases your total credit limit and causes your credit utilization rate to rise. This one-two punch can negatively impact your credit score, especially if your credit utilization suddenly spikes.
Credit utilization is the amount of credit you’re using out of the total amount of credit available to you. It accounts for 30% of your overall credit score. You should aim to have a credit utilization rate of 30% or below. For example, if your combined credit limit from credit cards, loans, and other financial products is $30,000, you should only aim to use $9,000.
If you use up too much of your available credit, potential lenders see you as over leveraged. They may think you’re spending beyond your means and might be worried that you won’t be able to make your payments. Spending too much of your available credit limit could make you seem like a risky borrower.
So what does cancelling a credit card have to do with your credit utilization rate? When you cancel a credit card, it actually decreases your overall credit limit. You have less available credit to spend overall, which causes your credit utilization to rise. When your credit utilization rate suddenly climbs above 30%, it can negatively impact your credit score.
To clarify things, let’s expand on the example above. Your total credit limit is $30,000 and you are currently using $8,000 of your available credit. Your credit utilization rate is 27%, which is below the recommended rate. If you cancel a credit card that has a credit limit of $10,000, it would decrease your overall available credit to $20,000. Your balance of $8,000 remains the same, but your credit limit has shrunk. You are now using 40% of your available credit, giving you a credit utilization rate of 40%. This is well over the recommended utilization rate of 30%.
A sudden spike in your credit utilization rate can cause your credit score to decrease substantially. Because of this, you should avoid cancelling credit cards that aren’t costing you anything. Making significant credit limit changes when you cancel a credit card can hurt your credit score. The larger the credit limit is for a cancelled credit card, the bigger hit your credit score could take.
Cancelling a Credit Card Shrinks Your Credit History
Cancelling a credit card will put a dent in your credit history. It will bring down the average age of your open credit accounts and could negatively impact your credit score.
Your credit history accounts for 15% of your credit score. The credit history section of your credit report shows how long you’ve had credit accounts open, the age of your oldest open credit account, and the average age of all of your credit accounts combined. Open credit accounts age like fine wine: the longer you have them, the better it is for your credit score.
Having a long credit history shows potential lenders that you can responsibly handle credit products. Long credit history gives lenders a clear picture of your spending and payment habits. Cancelling a credit card erases part of that picture and, depending on how old the credit card was, it can have a substantial impact on your credit score.
In my case, it was a huge mistake to cancel my oldest credit card, which was 15 years old. My second oldest credit card was only 6 years old, meaning potential lenders would not have a full picture of my credit history. The best predictor of future behaviour is past behaviour, and cancelling my oldest credit card meant lenders would not have an accurate picture of how well I had managed my credit over 15 years. It also brought the overall average age of my credit cards down substantially, which could have an impact on my credit score.
The bright side is that credit bureaus may keep cancelled cards on your record for anywhere between 6 to 10 years. Lenders who look at your credit report may notice your cancelled credit cards and consider that in their credit approval decisions.
How Can I Cancel my Credit Card without Impacting my Credit Score?
Luckily, there are several things you can do to avoid or minimize negative effects to your credit score when cancelling a credit card. Here are some recommended steps you should take when deciding to cancel a credit card:
Never cancel your oldest credit card
Ask your credit card provider for a product switch
Increase the credit limit of your existing credit cards
Pay off your existing balance before cancelling your credit card
Redeem rewards and credit card travel points before cancelling your credit card
Cancel or transfer recurring payments charged to your cancelled credit card
Check your credit report and credit score to confirm your cancellation
Never Cancel Your Oldest Credit Card
To maintain a strong credit history, the best thing to do is to never cancel your oldest credit card. Keeping your oldest credit card account open will positively contribute to your credit history and help you build up your credit score over time.
Just remember that your oldest credit card could be cancelled by your provider if it's been inactive for a certain amount of time. Inactive credit cards that have been cancelled can hurt your credit score by impacting your credit utilization rate, your credit history, and your credit mix. Credit card providers aren't required to notify you before they cancel an old credit card. To keep your oldest credit card open, you should use the card to make small purchases or auto-pay a regular bill.
Ask Your Credit Card Provider for a Product Switch
If you don’t like your oldest credit card because it doesn’t provide any rewards, you may have options to switch your card. You should contact your credit card provider and ask whether it’s possible to simply upgrade your basic card to a premium rewards card. You may be able to transfer your old card’s credit limit and history to the new card, which would minimize any impact to your credit score. Not all issuers may be willing to do this, but it’s certainly worth asking.
Increase the Credit Limit of your Existing Credit Cards
If you do decide to cancel a credit card, there are steps you should take to minimize the impact it could have on your score. To minimize impacts to your credit utilization rate, try increasing the credit limit of some of your other credit cards. You may be able to ask for credit limit increases from your credit card providers. This can help you avoid sudden spikes in your credit utilization rate when you cancel a credit card.
That said, you need to be smart and honest about this decision. If you tend to overspend on your cards, it’s not advisable to increase your credit limit. Increasing your credit limit could just give you a good excuse to spend more. Furthermore, credit card issuers’ willingness to increase your credit limit will be based on how well you’ve managed your credit card account to date, so it’s not a sure bet that they’ll increase your limit.
Pay Off your Existing Balance Before Cancelling
Never cancel a card if you still have a balance. If your balance is out of control it may be tempting to cancel your card, but that certainly won’t remedy the situation. Balances owing don’t just go away when you cancel your card—you will have to pay up eventually. The longer you wait, the more interest you’ll have to pay, which will only exacerbate your problem. Constantly missing payments can have a more harmful effect on your credit score as a sudden spike in your credit utilization rate.
Before you cancel your card, phone your credit card company to make sure there’s no balance on the card. Paying off the amount owing is more complicated once you’ve cancelled the card.
Redeem Rewards and Credit Card Travel Points
If you’ve got unused rewards or travel points, be sure to phone your credit card issuer to find out how long you have to use them before you lose them. Some credit card companies may cancel your rewards instantly, while others may allow you to use up your rewards for up to 30 or 60 days after cancellation. Redeeming your rewards after cancelling your card may only be available if your account is in good standing (i.e. you don’t have a huge unpaid balance).
You worked hard to earn your rewards so don’t lose them! If the card is affiliated with an independent reward loyalty program like AIR MILES, you won’t lose your rewards or points, as they are affiliated with the membership program rather than the card itself.
Cancel or Transfer Recurring Payments
Before you cancel your credit card, ensure you cancel any upcoming automatic payments so you don’t continue to build up a balance. You can always ask your provider what auto payments are linked with the card.
Check your Credit After You’ve Cancelled Your Card
To confirm that your credit card has been cancelled and the account is marked as closed, you should review your credit report. You can download your Equifax credit report for free by signing up for Borrowell. You’ll have access to a PDF version of your credit report, and you can review the credit accounts that are listed on your report.
You can also use Borrowell to check your credit score and see how your score was impacted by cancelling your credit card. If you’ve taken the steps and precautions listed above, the impacts to your credit should be fairly minimal. If you do notice a sudden drop in your credit score, the Borrowell app provides you with tailored tips on how to increase your score and provides you with personalized recommendations. If you’re looking to open another credit card, you can also see what credit cards you are likely to be approved for based on your credit score.
If you’ve noticed that your cancelled credit card is still listed as open on your credit report, there are ways you can file a credit report dispute with Equifax. You can dispute your credit report by providing the appropriate documents to Equifax either by mail or online.
If you Cancel Your Credit Card, Cancel It Safely
Cancelling a credit card without taking the proper precautions can damage your credit score. Cancelling a credit card will increase your credit utilization and shrink your credit history, which both influence your overall credit score. Of course, there are some times when cancelling a credit card is unavoidable, especially if you find yourself unable to control your overspending or you’re not paying off your balance each month.
So, if you do decide cancelling a credit card is for the best, follow the tips above on how to cancel your card safely. Once you’ve cancelled your credit card, make sure to check your free credit score from Borrowell to ensure that impacts to your score have been minimal!
Personal Finance Writer
Sandra MacGregor is a professional writer who specializes in topics such as finance, travel, health, and lifestyle. Her work has been featured in the Toronto Star, the Montreal Gazette, and the New York Times. She is a regular contributor to the Borrowell blog.