What Happens To Your Credit When You Cancel a Credit Card?
RP Funding CEO Robert Palmer discusses the impact canceling a credit card will have on your credit score and your ability to buy a home.
You sit there and just stare. There is nothing else to do. You don’t want to act out irrationally, but there is no other choice. Flashbacks of your relationship rush through your mind arousing a mixture of feelings. It was so good in the beginning. You spent so much time together. Dinner and a movie. Vacations. Shopping sprees. But it slowly began to sour.
It takes a lot of work to have a healthy relationship with your credit card. Applying for and obtaining a credit card is a serious commitment, so you should make sure you read things like this American express platinum review and reviews of other credit cards before making a decision. If you are not willing to put in the time and effort to manage the relationship properly, you should re-consider and do a little more financial soul searching. Because the more you fight it and mismanage that card, the sooner you will come to this point; scissors in hand, contemplating to cancel that line of credit. I mean, it has brought so much pain and anguish. Along with a large amount of debt to hurt your credit.
So having a credit card isn’t really comparable to a soap opera on-screen relationship. But if you aren’t committed to using that card properly you will find yourself in some financial trouble. If you want to know how you can manage and take advantage of your credit cards, just click here.
So here you are, wanting to cancel the card and move on with your life. But there is still the lingering question- Does canceling a credit card hurt your credit score? You know, that three-digit number that basically controls your life. Well before you start cutting away and hit the cancel button, let’s answer that ever-so-crucial question and break down how canceling a card could impact your credit score.
How Canceling a Card Impacts Your Credit Score
Canceling a card puts many gears in motion affecting many numbers that your score is composed of. The main factor, credit utilization ratio.
Your utilization is calculated by the total amount of your credit card balances to the credit limits on those accounts. A high utilization percentage will impact your credit score negatively. In most cases, the lower the utilization the higher the credit score. A high utilization ratio indicates to lenders that you have difficulty paying back your loans.
Closing a credit card will impact your utilization. Eliminating that account could bring your closer to your credit limit which would cause your utilization ratio to increase. This would mean most lenders would consider you a risk.
Let’s Look at The Numbers
Let’s say you have three credit cards. Each card has a limit of $2,000. One card is completely maxed out. The other is carrying a balance of $1,000. And you just paid the other off completely. So all together your credit limit is $6,000 and you total balance it $3,000. That means you have a utilization ratio of 50%. Not terrible, but not great.
You aren’t using the card you paid off and you want to make sure you don’t make any more purchases on it, so you cancel that card. Now you only have a credit limit of $4,000 but still have balance of $3,000. Now your ratio has spiked to 75%. A major difference that will cause your score to lower. You can see the correlation between your utilization ratio and credit score here.
The payment history on a closed account will not be ignored. In fact, it will stay on your credit report for over 10 years. So, if you have late payments or have been sent to collections, it will remain on your credit report impacting your score.
But, if you have remained in good standing with that credit card and zero flaws with your payment history, canceling that card will not hurt your score. Good payment history can continue to help your score, even with that account being closed.
Either way, your payment history will continue to be a part of your report for some time. Though the impact from the closed account will lessen over time.
The Age of The Account
The length of credit history makes up for 15% of your credit score. The longer the credit history your credit card has, the better it is for your score. Canceling that card will eventually eliminate that credit.
Your credit history can be compared to your career. The longer you are working and developing in your career, the more trustworthy and reliable you’re considered by your colleagues and boss. The longer your credit history the more lenders will see you as trustworthy.
Once eliminating that line of credit you could be impacting your credit history in a negative way. Shortening your credit history will definitely send your credit score in the wrong direction.
A mixture of different credit accounts can bode well for your credit score. Having credit cards, an auto loan, home loan and some others on your report can be a good thing.
Canceling your only credit card will most likely lower your credit score. Some will tell you to never have a credit card. That is the old way of thinking. You need a credit card. You have to have a credit card. The real advice being given should be—don’t abuse it. That is why Robert Palmer made it a Saving Thousands Rule.
A credit card with good credit history and low utilization is very good for your credit portfolio. That type of credit card account should never be closed.