Cancelling a Credit Card? Things to Consider
Cancelling a Credit Card? Things to Consider
Posted on July 19, 2021
Even though we’re an auto loan blog, credit cards form a large part of rebuilding credit and increasing your credit score. That means knowing how to successfully manage a credit card can have far-reaching effects on future car loans and your general financial wellbeing.
Which brings us to the question of the day, is cancelling a credit card a good idea?
We asked our Woodstock auto loans team to come up with a post outlining some tips around managing credit cards and to answer this question.
What happens when you want to cancel a credit card? Will that work for or against you in terms of credit?
Credit cards and auto loans
We will often recommend using a credit card to help rebuild credit. Whether that’s to help get you out of bad credit car loan territory or generally help you improve your score.
Either way, they can help a lot.
They can help build a positive payment history, increases your credit mix and benefits your credit utilization.
Cancelling credit cards
Cancelling credit cards is controversial. Getting rid of cards you don’t use keeps life simple and can work for you on a personal level. On a pure credit score level, cancelling them doesn’t work out quite so well.
Cancelling a credit card can:
- Narrow your credit mix as you have one fewer source of credit
- Reduce credit utilization as you have less available credit to use
- Reduce payment history as you won’t have regular payments hitting your credit report
- Shorten the age of a credit line, which is a minor positive to your credit score
If you’re not using the credit card, chances are, it isn’t helping your payment history much, as there won’t be any payments.
Therefore, your credit utilization is the next most influential element. That makes up to 30% of your credit score.
Credit utilization is a measure of how much available credit you’re using. If the credit card you’re planning to close has a $5,000 credit limit, you’re reducing your available credit by that much.
If you’re using a lot of your other available credit, this could be enough to drop your credit score.
For example, if you’re close to the 30% credit utilization limit while you have the card and then close it, your utilization will increase with the reduction of available credit.
Credit cards and you
If you want to cancel the credit card, go ahead and do it. It can be liberating freeing yourself from a form of credit, especially if you had to spend time and effort paying it off.
From a purely credit score perspective, it’s better to keep the card. It helps with credit mix, credit utilization, credit history and payment history if you’re using the card.
All with have a minor but very real beneficial impact on your credit score. This is especially useful if you’re rebuilding credit or trying to improve it in advance of an auto loan.
Contact Unique Chrysler for help, advice and competitive Woodstock car finance and leasing.
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