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How Cancelling a Credit Card Affects your Credit Score

Canadian Dollars asked a question on the Credit Card Arbitrage thread about the affect that canceling a credit card has on your credit score.

At first thought, I would think that canceling a credit card would improve your credit score because it would reduce your total available credit.  But it doesn't quite work like that.

After some research and help from fellow bloggers, it all comes down to the length of time that you held the credit card.  The older the credit card, the more weight or importance it has on your credit score.  In other words, credit history is an important factor in the credit scoring system.  Also note though that credit history only accounts for approximately 15% of your total credit score.

Here is what The Financial Blogger had to add:

It is true that it would hurt your credit score on a short term basis. However, if all your accounts are up-to-date, it will not make a huge difference after a few months.

The same situation happens when somebody is looking for financing for a mortgage or a car loan. That person might do 5 inquiries in the span of a month. It will automatically drop his credit score temporarily. However, after a few months, if he did not contract 5 loans but only one, his credit score will be back on track.

Within 6 months, closing a credit card will not have a significant impact on your credit score if you pay you other cards on time and if they are not maxed out. The key point with revolving credit is to have the outstanding balance fluctuate over time. 

So to answer Canadian Dollars question, providing that the cards that you cancel are fairly new or newer than your other credit cards, your credit score should not be affected with any significance.  However, canceling credit cards may be helpful if you're looking to get a mortgage in the near future as lenders look at the total credit available as one of their lending criteria. 

Lesson learned: If you have an old credit card in good standing, then think twice before canceling it as it may negatively impact your credit score.  However, as with any credit blemishes, time heals all credit wounds.

If you want to read more about how credit scores are determined there is tons of information on Thicken My Wallet and The Financial Blogger about credit scores. 







15 Comments, Comment or Ping

  1. Thx for the double mention ;-)

  2. 2. Traciatim

    I was under the impression that the credit score calculation was changed to allow for ‘shopping’ of credit. This would mean that multiple inquiries for the same type of credit (IE, You get 4 quotes for a Mortgage or Car Loan) would only effect your credit as one inquiry would so as not to make the 4th person deny you if you were walking a fine line.

    I can’t remember where I read it, but I think it was one one of those ‘top 10 myth’ lists somewhere.

  3. Traciatim,
    I think I did not make my point clear enough. I wanted to say that if you open all those credit account, your credit score will drop.

    However, if you just open one mortgage and you went to 4 different institution within a limited period of time, it is true that credit reporting agencies will count only 1 inquiry.

    People have tried to apply for more than one car loan in the same day and then, take all of them. They have no updated the credit inquiries system to make it live and to penalize individual who would open more than one credit account at the same time to avoid this kind of situation.

  4. 4. Jimmy

    What about reducing the credit limit on an old credit card? Does that have any effect?

  5. 5. Calvin

    Good question Jimmy… I’m also interested in an answer on that one.

    I recently cancelled a Citi Mastercard that I have not used in a while. The account had been open for a few years, but I have not used the card for months… wonder whether that will have much of an impact.

  6. 6. Trevor

    Another question. First off, I would like to say I never pay credit card interest. Pay in full every month. So I am wondering if it is better to have a credit card with a high limit (say 25k) and use only a small part of it or one with a low limit (say 5k) and have it almost maxed every month.

    Thanks!

  7. Jimmy, to my understanding, reducing credit limit will not affect your credit score.

    Calvin, it really depends on your credit history. Is that credit card the oldest of all your credit cards? Besides, credit history only makes up 15% of your credit score, and a few months should heal any wounds that canceling a credit card would inflict.

    Trevor, i’ve read that you should keep your credit card balance at less than 50% of the credit limit. So to answer your question, use your $25k card and only spend up to half.

  8. 8. Diva

    Reducing credit limit does affect your credit score if you have a balance owing.

    The reason is that part of your score is a factor of how maxed out you are. If you have a 20k limit and owe 5k then you are using 25% of your potential credit.

    If you reduce that limit to 10k now you are using 50% of your potential credit.

  9. Thanks for the mention. The best option for an old credit card is to run one bill a month on it and pay it promptly. Set up an automatic charge so you don’t think about it. It keeps the credit history current and, if you pay on time, shows good credit history.

  10. Hey FT, thanks for the post and link to my blog! Very much appreciated!

  11. 12. MAC

    is there a free canadian site to get your personal creidt score?

  12. 14. JC

    I have a TD GM visa, which is pretty much useless to me, as I never plan on buying a GM vehicle (and neither does anyone in my immediate family).

    I was considering cancelling the card, but I’m also interested in applying for the cash-back TD visa.

    Can I simply transfer (since they’re both TD cards)? Or do I have to cancel the GM card and apply for the cash-back card afterwards? I don’t care too much about my points, I’m just wondering how all this will affect my credit.

  13. 15. Denny

    Thanks this was very helpful information.

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