How closing your credit card could hurt your credit score
Will closing a credit card impact my credit score? This is a question that has come up repeatedly since the introduction of Comprehensive Credit Reporting (CCR) and the answer isn’t as simple as it seems.
The short answer is: Yes…generally.
Why? Because credit card accounts and their repayment history are now included on your credit file and a change to their status would more than likely have an impact on your score.
Now, the second part of the question: Will my score go up or down if I close a credit card?
The short answer: It depends…
An individual credit card account obviously is just one component of your credit file and your score is calculated based on all the information in your file. Exactly how your credit card is interacting with other parts of your file can vary.
How closing an account could hurt your score
There are a few reasons why closing an account could lower your score. Let’s take a look below.
1. The length of your credit history
How long you have held an account can be a factor in your credit score. This is because the longer you have held an account, the more you have demonstrated your ability to manage credit.
2. There’s no new repayment history
Closing an account means you won’t be able to demonstrate making your repayments each month and a strong repayment history is a key component of a strong credit score.
3. You may no longer be considered “credit active”
This is kind of a combination of the above, your credit score is a representation of how well you manage credit. So, if you only had 1 credit account and were to close it then you are no longer demonstrating that you can manage credit month to month.
4. You made a new credit application
If you are switching to a new card, then you may have made (or are going to make) a new application which equals a new enquiry on your file.
How closing an account could help you and your score
There are a few reasons why closing an account could actually increase your score. Let’s take a look below.
1. You have reduced your amount of available credit
As anyone who has made an application knows, one of the key questions you get asked is what credit products and limits you already have. If you already have a combined credit limit across different products, loans or cards then reducing that could look better on a future application.
2. You’re focusing your efforts
Closing an account might allow you to simplify your finances, meaning one less balance to manage or bill to pay. This is particularly helpful if you have a history of late or missed payments. If there are fees associated with the account, then closing it will mean one less fee to worry about too.
3. You’re reducing temptation
If you no longer have the credit readily available, then the temptation to use it won’t be there. This can be especially important if you are having difficulty managing the debt you already have. If you find yourself in this position, you may like to talk to the National Debt Helpline.
Remember, your score is not everything
Scores are there to be an indication of your creditworthiness for you and for lenders. When you apply for credit, the lender will use more than just your score in deciding whether to approve or decline your application.
Overall, your credit score is just part of your overall financial position and there can be things that could impact your score in the short term but benefit you now and even help your score in the long term. Ultimately, your financial and overall well-being is what is most important.
As always, Credit Savvy is here to help you access, track and monitor your credit score as well as help you with savvy tricks and ideas.