Your credit score is based on 5 major components:
- Your payment history (35%)
- The amount of debt you owe (30%)
- Length of your credit history (15%)
- New credit (10%)
- Different types of credit (10%)
But how do your credit activities influence these components and by extension your credit score? In this post Saveful looks at how cancelling a credit card can have an impact.
Cancelling a credit card will decrease your debt-to-credit ratio
Your debt-to-credit ratio is a big deal when it comes to your credit score. In fact, it makes up 30% of your score. If you have a lot of credit available but not much debt, your score will improve. For example, if you have used 10% of your available credit but a friend has used 30%, your score will likely be better than theirs all else equal, since you’re managing your available credit better.
When you cancel a credit card, you reduce the amount of credit you have available, which then increases your debt-to-credit ratio. In most cases, canceling one card is more likely to affect younger people who tend to not have much credit, rather than older people who tend to have more, as well as a stronger credit history.
Cancelling a credit card will have a varying effect on the average age of your accounts
Cancelling a card also affects the average age of your credit accounts, which is another important component of your score. The average amount of time you’ve had credit for doesn’t have as big an impact as your debt-to-credit ratio, but it still makes up a pretty significant 15% of your score, so it’s worth paying attention to.
The effect of cancelling a card depends on how long you’ve had that particular card and how long you’ve had all your other cards. For example, if you have 3 credit cards that you’ve had for 10 years and then cancel another card that you’ve only had for 1 year, this will actually increase the average age of your accounts and consequently can increase your score. However, if in the same example, you cancel one of the cards you’ve had for 10 years, then the average age of your accounts will decrease and it’s likely so will your score.
As such, try to maintain some long-term relationships with particular credit cards, ideally ones that have low or even no annual fees. That doesn’t mean you shouldn’t have credit cards with annual fees, especially ones with great benefits like rewards or cash back, which tend to cancel out the fees. But if you already have cards with no annual fees, then there’s no point of cancelling them especially since they’re actually making your score higher!