Does your credit score drop if you cancel a credit card

A brief look at how credit scores work

Credit bureaus calculate your credit score on a scale from 300 to 900, with 900 being excellent and 300 being poor. Anything over 660 is generally considered a good score. Lower than 560 is poor.

There are five factors that determine your credit score, according to Equifax, one of Canada’s largest credit bureaus. They all have varying degrees of importance. 

1. Payment history: 35% of credit score. Your payment history is the largest factor in determining your credit score. Lenders want to see that you pay on time and in full. If you miss payments or don’t pay the full amount, it will hurt your score.
2. Credit utilization:30% of credit score. This looks at what percentage of your credit you actually use. If you have a $1,000 limit on a credit card and carry a balance of $250, then your credit utilization is 25%. Lenders like to see you use 30% or less. Understanding your credit card limit can help you manage how much you use at a time.
3. Credit history: 15% of credit score. This looks at how long your credit accounts have been open. Lenders like to see that you’ve handled credit properly over a long period of time. 
4. Credit mix: 10% credit score. Lenders like to see you have a mix of credit accounts that you’ve handled well over time, personal loans, credit cards, mortgages, etc.
5. Credit inquiries: 10% of credit score. When you apply for new credit, your credit file is accessed. Lenders don’t like to see someone applying for new credit on a regular basis.

So how does cancelling a credit card affect these?

How cancelling a credit card affects your credit score

Let’s look at each factor in determining your credit score and what the impact of cancelling a credit card has on each.

Payment history

Cancelling a credit card won’t erase your payment history from your credit report. Your payment history from the card you cancel stays on file. This means cancelling a credit card does not hurt your payment history.

Credit utilization

Your credit utilization will take a hit if you cancel a credit card, though the impact may not be as big as you think.

Let’s say you have two credit cards. Both have a $1,000 limit, giving you $2,000 in available credit overall. 

You use one of the cards all the time and the other one never. The card you don’t use has an annual fee of $35. You have a balance of $250 on the card you use. 

With both cards your credit utilization is 12.5% ($250 ÷ $2,000). 

If you cancel the one you don’t use, your credit utilization will jump to 25%.

However, if you can properly handle your costs with just one credit card, this is not a big issue. Your credit score will recover over time, and you’ll save $35 by cancelling the one you don’t use. 

In this case your credit score will dip slightly, but it will recover on its own in a few months, and you’ll save money.

Credit history

Closing a credit card account will affect your credit history. Credit history looks at how long your credit accounts have been open. Cancelling a credit card you’ve had for a long time will cause your credit score to drop. 

Credit history makes up only 15% of your credit score, so the impact on your overall score will likely be small. If you manage your other credit accounts properly after cancelling, your score will likely return to normal after a few months.

Credit mix

Cancelling a credit card is unlikely to affect your credit mix as long as you have another credit card. Closing a credit account will likely have no impact on this category of your credit score.

Credit inquiries

Closing your credit card account does not require a credit inquiry, so this category will not be affected by you cancelling the card.

How much of a drop can you expect when you cancel a credit card?

The impact on your credit score varies widely when you cancel a credit card. It really depends on what your score is before you cancel the card.

A good credit score might drop by 2-25 points, but this decrease is usually temporary. It should return to normal in a few months if you continue to use credit responsibly.

Even if you have a bad score, the drop may not be big, but it hurts more because every point matters when you're already in a lower credit tier. This could make it harder to rebuild your credit score and may limit your access to loans or new credit cards.

So, when should you cancel a credit card?

Before cancelling any credit card, look at your spending habits. 

Could you for sure handle all your financial obligations after cancelling one of your cards and pay on time and in full? 

If the answer to that is “Yes,” then cancelling a card is something to consider. 

Do you have a credit card with an annual fee that you rarely or never use? If you aren’t earning enough rewards from the card to justify the fee, then cancelling it will save you money.

Closing a credit card may even make you less tempted to spend more than you need to.

While your credit score may drop slightly, it will recover relatively quickly as long as you have good financial habits.

Struggling with credit? We can help

If you're struggling with credit card debt or concerned about your credit score, our Licensed Insolvency Trustees can help. They provide judgment-free guidance and offer the first consultation completely free.

Our Trustees understand that everyone's financial situation is unique. They'll review your circumstances and help you find a solution that works for your specific needs.

Don't let credit challenges overwhelm you. Professional help is available to help you become debt-free.

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