Q: How will cancelling a credit card (that is paid in full) affect my credit score?
A: Cancelling a credit card in good standing could negatively impact your score, but maybe not for the reason you think.
A key concept to understand in the calculation of your credit score is “utilization”. This will reflect how much of your available credit you are currently using. For this example, let’s say you have three cards. The first card has a limit of $5,000 and you don’t have a balance on it. The second card also has a limit of $5,000 and you have a balance of $1,500 on it. The third card, you guessed it, has a balance of $5,000 and has a balance of $4,200. To determine the utilization we’ll need to divide the total credit being used by the total credit available. So, $5,700/$15,000 = 38%. In order to get the best score possible you’ll need to keep your overall utilization below 30%, but we’re just a bit over.
So, let’s say we decide to cancel the card that we don’t have a balance on because we never use it and want to organize our financial life a bit. Our utilization is now $5,700/$10,000, or 57%. Oops!
You’ll need to keep utilization in mind when it comes to cancelling a card so you don’t negatively impact your score. Don’t be concerned about losing good credit history if you cancel the card, however. That activity (good or bad) will stay on your credit report for 7-10 years after the card is cancelled and be factored into your score.
So, you can cancel a card without it impacting your credit score, but you need to make sure the rest of your credit cards are in order for it to happen.
Want more financial help just like this? You can talk to one of our experts today! Our monthly subscriptions are super affordable and can save you tons of money, energy, and stress in the long run. Learn more here.