There may be many reasons why you are considering cancelling a credit card. You may want to limit the amount of debt on your name, or just want to get rid of a card you don't use often.
But closing a credit card could have an impact on your credit score, and it may influence other factors on your credit file as well.
So let's take a look at how cancelling credit card accounts may affect your credit score and how to close a credit card account properly.
Yes, cancelling a credit card could hurt your credit score. There are many different factors that affect your credit profile, and closing a credit card account may impact this.
The longer you've had your credit accounts open the better it may be for your credit profile. Closing a credit card account may reduce the total length of your credit accounts and also reduce the average of all your other credit accounts.
Your credit utilisation ratio, which measures how much of your available credit you are utilising across all of your accounts, is another important element that could be impacted.
If you divide the total of your balances on credit accounts by the total of your credit limits, you may get your utilisation ratio. The ratio is then converted to a percentage by multiplying that amount by 100. As an example, if you have a total credit limit of £2,000 and you've used £1,000, your credit utilisation ratio will be at 50%.
If you close a credit account, your total available amount of credit will be reduced, which in turn will increase your overall ratio. So, if you have a credit card with a £500 limit, even though you haven't used it, following the example above, you'll be reducing your total credit limit to £1,500. This means you'll now have a utilisation ratio of 67%.
If you want to cancel a credit card, keep in mind that it might damage your credit score. So before you make your decision, here are three steps to take.
Check the duration of each of your card accounts. By obtaining a free credit report, you may accomplish this. If you've had a card for a while that you want to close, you might want to think twice.
Why? The three major credit reporting companies include how long you've had an open credit file when calculating your credit score.
If you have good credit, cancelling one card might not have a significant impact on your rating. But if your credit score isn't great, cancelling a long-held card can shorten the average age of your accounts, which will hurt your score.
The amount of credit you have access to will change if a credit card is closed as well. This is also a consideration in determining your score and is referred to as your credit utilisation ratio. In general, your credit score is better if you have access to more credit and utilise it sparingly.
You are using 25% of your available credit if you have two credit cards with a combined £5,000 limit and have a balance of £2,500 on one of them. But if you cancel one of those cards, the remaining debt will now use 50% of your available credit.
Your available credit card limits will decrease every time you close a card, which could have an impact on your credit score. How much will depend on the number of other cards you have and the total amount of debt you have on them.
It might be worthwhile to think about cancelling the card if it has a high annual fee or if you're a hard-core credit card user who churns and burns through cards and their sign-up incentives, but first look at your total credit profile to see how it might influence your score.
You might be better off stashing that unwanted card in a drawer and forgetting about it if you discover that you have more cards than you can manage or you simply want to streamline things.
The credit line you were given with that card can still be helpful to you even if you aren't using it because it will contribute to your credit utilisation ratio.
Remember that a closed account can continue to appear on your credit report for up to 10 years, even if it was in good standing at the time.
Closing a card account may sound simple, but it's important that you do it correctly.
Even though a credit card can be closed with a balance, you might want to think about paying it off first. You're still liable for any outstanding interest, balance, and other possible fees even if you close your account. Additionally, paying off your bill first will assist in limiting your credit utilisation. And doing so can lessen the effects on your credit file.
Due to fees and interest, your card's payoff amount occasionally may exceed the balance on your statement. Make sure to validate your debt with your credit card issuer.
You may easily close your account by signing in with various credit card issuers. You might also be able to request it by calling the company that issued your card. In either case, think about requesting written confirmation. In this manner, you create a permanent record in case anything is contested.
You might want to review your credit file after cancelling your card. Visit Experian.co.uk to find out how to obtain free credit reports and scores from each of the three major credit reference agencies.
Before cancelling a credit card, here are some alternatives to consider:
Upgrade your card. You might be able to switch to a different card from the same issuer if you aren't using your existing card frequently or if it doesn't suit your needs. You might maintain your previous account history and also receive new benefits and points, depending on how your issuer handles upgrades.
Transfer your credit card balance. If you want to consider debt consolidation to reduce your interest rate, consider a balance transfer credit card. Remember to include any fees or terms required.
Make smaller purchases. When you don’t use your card that much, think about setting up a small purchase on a recurring basis to help maintain the activity on your card.