Does closing a credit card hurt your credit?

 

We often talk about how to build credit by getting a credit card and managing it sensibly. But what about when you need to close a credit card account? Our guide will explain how to go about it in the right way and what to look out for if you decide to close your credit card.

At a glance…

  • Closing a credit card can affect your credit score. But there are things you can do to limit the impact.
  • Making sure you’re not using too much of your available credit can do a lot to improve your credit score.
  • Look at the pros and cons of cancelling a credit card before you do it.

How does closing a credit card impact credit score?

It may seem like a good move, but closing a credit card could have an impact on your credit score.

 

When you close a credit card, it could mean you’re increasing your credit utilisation ratio. This can have a negative impact on your credit score.

 

A long-standing credit card can look good to potential lenders, as they can see that you’ve successfully managed the repayments for a prolonged period. Closing your oldest credit card can reduce the overall age of your accounts, which could bring your credit score.

 

Sometimes, it’s a good idea to cancel the credit card. But it’s vital to weigh up the pros and cons beforehand.

 

Credit utilisation ratios

Your credit utilisation ratio (or credit utilisation rate as it’s more commonly known) is the average amount of credit you use as a percentage of the credit available.

 

Say you have a credit card with a £10,000 credit limit. If you regularly use and pay back around £3,000 each month, you’ll have a credit utilisation ratio of 30%.

 

Regularly using too much, or all, of your available credit may affect your credit score. Experian recommends you use no more than 30% of your available credit regularly.

 

Cancelling a card when you have a high credit utilisation ratio can lead to problems, as it may worsen the ratio and harm your credit score.

 

How can you cancel a credit card?

If you want to close a credit card account, you can’t just stop your Direct Debits and throw the card away. You need to cancel the account properly to make sure you don’t miss payments or get a County Court Judgment (CCJ) against you.

 

Contact your lender directly and tell them you’re looking to cancel your card. If you have any outstanding debt on the account, you’ll need to make sure it’s paid off. Once the debt’s settled, the credit card account will be closed.

 

How does closing a credit card impact your credit score?

Before closing a credit card, you should take a look at all your credit agreements. When deciding whether to approve you, most lenders will review your overall credit file and any different agreements (like cards or loans) you have. After that, they’ll look at your credit utilisation ratio.

 

Using the example above, if you decide to cancel an unused card that has an available balance, this could affect the overall figure for how much credit you’ve used.

 

A few reasons not to close your credit card

Closing a card that you’re not using might seem like a smart idea. But before you go ahead, have a think about these things:

  • If you’ve had the card for a while, cancelling it might impact your credit history.
  • If you’re considering applying for other credit or a mortgage, any sudden changes on your credit file could affect your application.
  • You may have rewards or incentives with your card which you’d lose.

 

Advantages of closing your credit card

There may be reasons why closing a credit card could help you (depending on your financial situation).

 

Some of the advantages include:

  • Without a credit card, there’s no temptation to overspend or build up debt.
  • If you have multiple cards and repayments to make, each one you cancel means one less card to keep track of.
  • It reduces your chance of credit card fraud if you lose your card or your account is compromised.

Ways to close your credit card safely

So, after careful consideration, you’ve decided to close your credit card account. There are several ways to do this so make sure you close your card in the right way.

 

Get in touch with your credit card company

 

A good first step is to call your card provider. There may be important things to think about when closing an account, like fees to pay and unused rewards you may want to use before cancelling.

Pay off any remaining balance

 

It sounds obvious, but making sure you repay all the debt on your card is vital. You won’t be able to close an account with a remaining balance, so you’ll need to pay it off or transfer it to another card.

Cancel your Direct Debit

 

Once your balance is clear and you’ve told your provider you want to close your credit card, you can cancel any Direct Debits for your account. Keeping these going may mean payments are still taken, so shut them down when you can.

 

We also recommend you:

  • Check if there are any rewards which you’d lose if you were to close your card. You may be able to claim these benefits before you cancel. Or there could be a date they need to be used by.
  • Confirm your account closure in writing (keep a copy) or by sending an email to the card provider. This way, you have proof they know you want to close the account.
  • As well as Direct Debits, you may have regular payments that come from your credit card. This might include gym memberships or TV subscriptions, like Netflix. They’ll need to be cancelled before your card account is closed.

Once you’ve done the above, it’s a good idea to cut up your card and get rid of it securely. This’ll stop any temptation to start using it again. And it’ll prevent anyone else getting their hands on it. It’s also good practice to check on your credit file once your account has been cancelled to make sure everything’s been reported correctly and there are no mistakes.

Alternatives to closing your card

If you decide you want to keep your account - but still don’t want to use it for whatever reason - there are some good alternatives to cancelling.

  • Put the card away
    If you want to keep your card but you’re not using it, put it in a drawer or another safe place. You won’t be tempted to use it but it’ll stay on your credit file.
  • Set up a regular payment
    If you want the card to remain active but would like to avoid spending a lot with it, think about using it for a small regular payment. Using it for a regular subscription, like a streaming service or food delivery, will allow you to keep it active. But this way, it’ll be easier to make sure the card is paid off each month - you can just set up a regular payment.
  • Ask for a new card
    If your card has a high interest rate or you want to see if you can get a card with better rewards, ask your provider. You may be eligible for a card with a lower rate and more incentives that suits you better.

 

 

Is it better to cancel unused credit cards or keep them?

This depends on your financial situation. However, this decision should depend on the type of credit you have.

 

Getting rid of long-standing cards can affect your credit file, so be careful when choosing which credit cards to cancel.