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Will cancelling a credit card affect my credit score?

Cancelling a credit card could have a positive or negative impact on your credit score, depending on the circumstances.

Your credit score is based on the details listed on your credit file, which includes information about active and closed accounts. This means any change to your credit file, including cancelling a card or reducing your credit card limit, could affect your credit score.

But how do you know if cancelling a card will have a good or bad impact on your score? This will really depend on your individual situation, and whether cancelling the card would be considered a positive or negative sign by lenders.

How cancelling a card can impact your credit score

For example, if you have a high credit limit, reducing it by cancelling a credit card would likely be seen as a positive and may improve your credit score.

In contrast, cancelling your only credit card that your always pay off on time could have the opposite effect as you'll no longer be demonstrating your ability to pay off your debts on time.

Because a credit card will be just one part of your credit file, the impact it has (or doesn't have) on your credit score also depends on other details listed on your file. So before you go ahead and cancel your credit card, let's take a look at three ways it could help or hurt your credit score.

3 ways cancelling a credit card could improve your credit score

In general, your credit score is improved when you reduce some of the potential risks for lenders. So, if cancelling a credit card leads to any of the following changes, it could have a positive impact on your score:

  • If it gets rid of a high credit limit. Having access to a lot of credit can hurt your credit score because it increases the risk that any new lenders would face if you applied for another card or loan. By cancelling your credit card, you'll reduce this risk, which could also improve your credit score.
  • If it shows you've settled outstanding payments. Before you can close a credit card account, you'll need to make sure the balance is cleared. So, if you have previously had late payments or defaults recorded on this account, closing it could show you're taking control of your debts.
  • If it helps you make other payments on time. Once you've closed your credit card account, you'll have one less bill to think about each month. If this makes it easier to deal with other accounts, it could improve your payment history and your credit score.

Check out more ways to improve your credit score

3 ways cancelling a credit card could hurt your credit score

If your credit history also shows you've recently made some late payments or have defaulted on accounts, cancelling your card might hurt your score or leave it unchanged.

  • If you have a lot of recent applications. Applying for a lot of credit cards (or other credit accounts) over a few months increases the level of risk for your existing and potential lenders. It may suggest that you're struggling with debt or that you're jumping from one credit card to another in order to take advantage of introductory offers. While there's not technically anything wrong with that, credit card companies do frown on this type of behaviour.
  • If it was your only credit account. Cancelling a credit card when you don't have any other loans or credit accounts limits the amount of information you'll have on your credit file. That means your credit score could drop or remain unchanged until you apply for a new card.
  • If making payments on your other accounts is still a challenge. While cancelling a credit card could be a step in the right direction, you may still find that it's difficult to make payments on your other accounts. This could lead to more late payments or defaults that lower your credit score. If you need help dealing with your credit accounts, you can get free support by calling Financial Counselling Australia on 1800 007 007 between 9:30am and 4:30pm Monday to Friday (AEST).

Other financial help services and options

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What about my debt-to-credit ratio?

Debt-to-credit ratios are an important factor for credit scores in the US, showing how much debt someone is carrying versus the amount of credit they have access to through cards and other accounts. Cancelling a card could affect this ratio by reducing the amount of available credit.

As there is a lot of information online about US credit ratings, this term often comes up when you're searching for details on Australian credit scores. However, debt-to-credit ratios are not a factor for credit scores in Australia because our credit files only show the maximum amount of credit available (i.e. your approved credit limit for a credit card).

Finder confirmed this with credit reporting bureau Experian's general manager of credit services for Australia and New Zealand, Tristan Taylor, who told us "no credit bureau can report the balance on credit cards or any other facility".

The privacy act explicitly states which data elements can be collected and shared by a credit bureau, and balance is not one of them.”

Taylor said the main elements relating to a credit facility that a credit bureau can collect and share are:

  • Type of credit (e.g. credit card, home loan)
  • Credit limit
  • Open and close date
  • Term of loan
  • Repayment behaviour (on a rolling 24 month window)

So, your credit score is based on the total amount of credit you have access to, as well as repayment history and applications for credit. But when you apply for a credit product, lenders may factor in the amount of credit you owe as well as your total access to credit, as part of their assessment.

Does cancelling a credit card always have an impact on credit scores?

Getting rid of a credit card doesn't always have an impact on your credit score. For example, if you've just got a new credit card and then closed the old one (or vice versa), it may not change your overall score.

It's also important to keep in mind that your credit score can fluctuate as more details are added to your credit file. So even if cancelling a credit card does affect your credit score in the short term, how you manage your accounts over time will play a greater role when it comes to getting approved for the cards and loans you want in the future.

Does reducing my credit card limit affect my credit score?

Yes, reducing your credit limit is one way that you can improve your credit score and can be an alternative to cancelling your card altogether. Having a high total credit limit can impact whether you'll be approved for further credit and also damage your credit score.

If you have multiple accounts with unused credit or high limits that you're not using, you could consider consolidating your debts or reducing your credit limit to boost your score.

How to reduce your credit card limit

  1. Contact your bank provider (online, over the phone or in-branch)
  2. Request the credit limit decrease
  3. Your credit limit will be updated within 24-48 hours

If I reduce my credit limit now, can I apply for a higher credit limit later?

Yes, you can but most Australian financial institutions limit you to one application for a credit limit increase every six months. Please note that you'll need to go through a credit check each time you apply for a credit limit increase.

Lower credit card limits didn't affect my credit score... Why?

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