Debt-to-credit ratios, also commonly known as credit utilization ratios, are an important factor for credit scores in Canada. This ratio shows how much debt someone is carrying versus the amount of credit they have access to through credit cards and other accounts. Cancelling a card could affect this ratio by reducing the amount of available credit, while your debt will remain the same. Strive to have a ratio under 30%.
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Will cancelling a credit card affect my credit score?
Since credit card accounts are included on your credit file, cancelling one could have an impact on your credit score.
Your credit score is based on the details listed on your credit file, which includes information about active and closed accounts. This means any change to your credit file, including cancelling a credit card, could potentially affect your credit score.
Since this is just one part of your credit file, the impact it has – or doesn’t have – on your credit score also depends on other details listed on your file. So before you go ahead and cancel your credit card, let’s take a look at three ways it could help – or hurt – your credit score.
In general, your credit score is improved when you reduce some of the potential risks for lenders. So, if cancelling a credit card leads to any of the following changes, it could have a positive impact on your score.
- If it gets rid of a high credit limit. Having access to a lot of credit can hurt your credit score because it increases the risk that any new lenders would face if you applied for another card or loan. By cancelling your credit card, you’ll reduce this risk, which could also improve your credit score.
- If it shows you’ve settled outstanding payments. Before you can close a credit card account, you’ll need to make sure the balance is cleared. So, if you have previously had late payments or defaults recorded on this account, closing it could show you’re taking control of your debts.
- If it helps you make other payments on time. Once you’ve closed your credit card account, you’ll have one less bill to think about each month. If this makes it easier to deal with other accounts, it could improve your payment history and your credit score.
If your credit history also shows you’ve recently made some late payments or have defaulted on accounts, cancelling your card might hurt your score –or leave it unchanged.
- If you have a lot of recent applications. Applying for a lot of credit cards – or other credit accounts like loans – over a few months increases the level of risk for your existing and potential lenders. It may suggest that you’re struggling with debt or that you’re jumping from one credit card to another in order to take advantage of introductory offers. While there’s not technically anything wrong with that, credit card providers do frown on this type of behaviour.
- If it was your only credit account. Cancelling a credit card when you don’t have any other loans or credit accounts limits the amount of information you’ll have on your credit file. That means your credit score could drop or remain unchanged until you apply for a new card.
- If making payments on your other accounts is still a challenge. While cancelling a credit card could be a step in the right direction, you may still find that it’s difficult to make payments on your other accounts. This could lead to more late payments or defaults that lower your credit score.
Getting rid of a credit card doesn’t always have an impact on your credit score. For example, if you’ve just got a new credit card and then closed the old one (or vice versa), it may not change your overall score.
It’s also important to keep in mind that your credit score can fluctuate as more details are added to your credit file. So even if cancelling a credit card does affect your credit score in the short term, how you manage your accounts over time will play a greater role when it comes to getting approved for the cards and loans you want in the future.
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