Here's how closing your credit card affects your credit score

If your wallet is overflowing with credit cards, you may feel the urge to declutter your collection and close out unused credit accounts. Or perhaps you see cancelling a credit card as a move to curb overspending. Whatever your reasons, you may want to think twice about ending the credit card relationship, as cancelling a credit card could impact your credit score.

Keep on reading to learn how closing a credit card affects your credit score so you can approach the situation with financial savviness.

The short answer is yes, cancelling your credit card may have a negative impact on your credit score.^{1, 4} However, there are factors to consider like how much it will be affected and is there a good way of going about closing a credit card?

Pulling the plug on a credit card can affect two important factors used to calculate your credit profile:

• your credit history
• and credit utilization ratio.

Combined, these two factors can make up almost half (45%) of your credit score.

In general, credit scoring models reward you for long-standing credit accounts and only use a small percentage (less than 30%) of your credit limit.¹ So if you cancel a credit card (especially one you've had for a while), it could reduce the average age of your accounts and affect the amount of available credit you are using — triggering your credit rating to drop.

There's no definitive, one-size-fits-all figure. Ultimately, the impact of cancelling a credit card largely depends on your credit situation and the credit scoring model that's used.² For instance, if you have a good credit score, closing a credit card might not have a huge or long-lasting impact on your rating.³

But here's the good news: Even if your credit score drops after closing a credit card, it will typically recover within a few months if you continue to make your payments on time and use credit responsibly.⁴

To understand what happens after you close a credit card, you need to understand what affects your credit score. Some of the primary factors that play into calculating your credit rating include:⁵

• Your payment history (do you pay your bills/debts on time?)
• Your credit utilization ratio (or used vs. your available credit)
• The length of your credit history
• Public records
• Number of inquiries into your credit file

If you close a credit card, it can change the way your credit score is calculated in two major ways. Specifically, cancelling a credit card can shorten the length of your credit history and increase your credit utilization ratio (meaning you use a bigger chunk of your available credit limit), which can impact your credit rating. Here's a breakdown of why and how that works.

If you're using the credit card responsibly and it has no annual fee, you may want to just tuck it back into your wallet and leave it open. Since it's not costing you anything, it can benefit you to keep the account open. You can use it as a tool to build a longer credit history and minimize your credit utilization ratio. However, just bear in mind that the issuer might close the account if you don't use it for a long time, which can ultimately impact your credit score.¹⁷  

But if you're paying a fee for a credit card you don't use or you're unhappy with, cancelling the card might make sense and can be done in a way to initially minimize the impact on your score. If you're looking to curb overspending, it might also make sense for you to cut down on the number of credit cards in your wallet.

Plus, your credit score will typically rebound after closing a credit card. Just keep using your credit responsibly and your credit score will likely eventually recover.

Before you get busy closing credit cards, consider the following potential advantages and disadvantages of closing a credit card account. Whether you decide to close your card or not, ensure you evaluate your options and are informed about the pros and cons.

If you've decided to say goodbye to a credit card, below are some tips for safely closing the account. Before you begin, however, remember to choose widely which credit card to cancel. Cancelling a credit card that you've recently opened will have less of a negative impact on your credit score than closing an older account.¹⁵ So if you must cancel a card, you may want to first go with the account that was opened most recently. But a general guideline is to keep a new credit card open for a few months before cancelling it.

• Ensure that the balance is paid in full and there are no outstanding balances before you shut it down.
• Pay off the balance, stop using the card and deactivate any automatic transfers you've scheduled to the card.
• You could also do a balance transfer to a different type of credit card.

• After you cancel the card, get written confirmation of the cancellation. If you ever have to dispute your credit history entries, having this proof will come in handy.

• Check your credit reports to ensure that the information has been reported correctly to the credit reporting agency.
• You can get your free credit score check online via the Credit View service available through your Scotiabank mobile app. This Credit View feature is powered by TransUnion, so you're getting your credit score directly from one of Canada's leading credit bureaus.

• After cancelling your credit card, do everything you can to stay in good standing: make payments regularly and on time to all your other credit accounts.
• Your credit score will gradually recover if you continue to use credit responsibly.¹³
• However, it may take some time, so you may want to avoid taking on any new debt, like a mortgage or car loan, until your score rebounds^.14

Cancelling a credit card may seem like no big deal, but it could have an impact on your overall credit score. So, whether you choose to close an old card, or keep it in your wallet longer, if you've done your research and are aware of the pros and cons of either of those choices, you're in a good place.