✔ Cancelling one or more of your credit cards can impact your credit rating.
✔ When you cancel a card, it reduces your available credit and erases your credit history—just two things that can impact your credit score.
✔ Understand the impact of how cancelling a card can affect your score by getting a copy of your credit report.
According to the Canadian Bankers Association, there are 76.2 million Visa and Mastercard cards in circulation in Canada.¹ That means most people have more than one card and some probably have quite a few. If you have multiple cards in your wallet and find that you’re not using all of them, you may think the best thing to do is cancel the ones you don’t use. But before you do, read on to understand how getting rid of a card may affect your credit score.
The importance of your credit score
A credit score is a reflection of your overall financial health. Whether you’re applying for a loan, apartment or a job—lenders, landlords and employers will ask your permission to view your credit report which contains your credit score.
When you cancel a card, your score will be impacted. So before you take the next step, review the information below to help you determine if you should do it now.
Three ways cancelling a credit card impacts your credit
1. It reduces the amount of credit you have
Having two or three credit cards and paying down the balance regularly and on time is an ideal way to build good credit. It shows that you are responsible and trustworthy. But if you choose to cancel your only card or one of the two you have, you can expect your credit score to go down.
2. It impacts your credit utilization rate
Your available credit is the total amount of money you could borrow today using all of your credit cards and lines of credit. How much you are using is called your credit utilization rate (CUR). A good CUR is 30%. Here’s how it works:
Suppose you have three credit cards and each one has a credit limit of $6,000. Your total “available credit” is $18,000 ($6,000 multiplied by 3). If you owe $1,800 on each card (a total of $5,400), you’re using just 30 per cent of what’s available. That’s good.
However, if you have only one credit card, with a limit of $6,000 and you owe $5,400, that means you are using 90 per cent of your available credit, which will hurt your credit score. So if cancelling a credit card is going to result in a CUR above 30 per cent, you may want to hold off until you’ve paid down more of what you owe.
3. Your credit history gets erased
When you cancel a credit card, your history with the lender gets erased, including your good track record. So if you’re young or new to Canada and you don’t have a very long credit history, you may want to pay off one of your cards but not cancel it.
Know your score
You can get a copy of and view your credit report for free once a year from each of Canada’s two credit bureaus, TransUnion and Equifax. Requesting one in January and the other in June will give you a free snapshot of your financial history. Take some time to review the information for accuracy and know your credit score. If you notice mistakes, here’s how to get them fixed.
Is it right for you?
If you’re struggling to manage multiple cards and keep up with the payments, or have a credit card that you may not be using, cancelling one card may be the answer. The best way to decide if this approach is right for you is to understand where your credit stands today, and how to maintain good money habits that will help to minimize the impact cancelling may have on your credit score.
Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.
¹Focus: Credit Cards: Statistics and Facts. CBA credit card statistics as of January 2021. Posted March 31, 2023. Source.