How Does Cancelling a Card Affect Credit?
Learn how cancelling a credit card affects your credit score. Understand the deeper financial implications.
A credit score serves as a numerical representation of an individual’s creditworthiness, influencing access to loans, credit cards, and even housing. One common question involves the impact of closing a credit card account on one’s credit standing. The decision to cancel a credit card can have various effects on a credit score, depending on several underlying factors.
Credit Utilization and Card Cancellation
Credit utilization represents the amount of credit you are currently using compared to your total available credit. This ratio is calculated by dividing your total outstanding credit card balances by your total credit limits across all revolving accounts. A lower credit utilization ratio indicates responsible credit management and can positively influence a credit score. For example, if you have a total credit limit of $10,000 across all cards and outstanding balances of $2,000, your utilization is 20%.
Canceling a credit card directly reduces your total available credit, which can increase your credit utilization ratio if your outstanding balances remain unchanged. If you cancel a card with a $5,000 limit, and your other cards have a combined limit of $5,000, your total available credit drops from $10,000 to $5,000. Maintaining the same $2,000 balance on your remaining cards would then push your utilization to 40%. A higher utilization percentage is viewed negatively by credit scoring models, potentially leading to a decrease in your score.
Credit History Length and Card Cancellation
The length of your credit history is another component that influences your credit score. This factor considers the age of your oldest credit account, the age of your newest account, and the average age of all your accounts. Accounts that have been open and in good standing for a longer duration contribute more favorably to your credit profile.
When you cancel a credit card, particularly an older one, it can impact the average age of your credit accounts. While a closed account with a positive payment history usually remains on your credit report for up to 10 years from the date of closure, its contribution to the average age calculation may diminish over time. As new accounts are opened, or as the closed account eventually ages off the report, the overall average age of your active credit history can decrease. This reduction in the average age of accounts may then result in a negative adjustment to your credit score.
Other Factors and Credit Score Models
Beyond credit utilization and the length of credit history, other elements can factor into the impact of card cancellation. The diversity of your credit accounts, known as credit mix, is one such factor. If the canceled card was your only type of revolving credit, its closure could subtly alter your credit mix, though this is a less impactful aspect for most consumers. The primary influence on your score following a cancellation will stem from changes in utilization and the average age of accounts.
Credit scoring models, such as FICO and VantageScore, weigh these components differently when calculating a score. The specific impact of canceling a credit card is not uniform for everyone; it depends on the unique composition of an individual’s credit report at the time of cancellation. These models dynamically adjust based on changes reported by creditors. While canceling a card can affect your score, the exact degree of that effect is determined by how these models interpret the changes within your overall credit profile, and the impact may not be immediate.