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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, could affect your credit score.
But because this is 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.
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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:
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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.
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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 in Australia because our credit files only show the total amount of credit available. This means lenders in Australia typically to look at the amount of credit you have access to in comparison to your income.
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.
This guide explains credit score ranges from weak through to an excellent score. We cover the differences from Equifax, Experian and Illion.
Read more…Credit reporting bureaus issue credit reports and scores to consumers and lenders. Discover how they work in this guide.
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