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Will you hurt your credit score if you cancel your credit card?

Will you hurt your credit score if you cancel your credit card?

If you have a credit card that you’ve successfully paid off in full, and perhaps feel that you’d be better off without for one reason or another, you might be considering cancelling it and closing the account altogether.

But when it comes to making decisions about credit products, having your credit score front of mind is never a bad idea. After all, your credit score is determined by your credit activity.

So, it’s reasonable to wonder whether ditching your credit card could negatively impact your credit score.

The short answer is that cancelling a credit card could hurt your credit score, but that doesn’t necessarily mean it will.

Australian credit reporting bureaus don’t disclose exactly how each kind of credit event will affect your credit score, but generally speaking, it will depend on a number of factors.

In what ways could cancelling a credit card hurt your credit score?

There are several different situations in which cancelling your card could result in a lowered credit score, some of which are as follows:

1. You’ve decided to switch to another credit card product

If you’re considering closing your existing credit card and applying for a new one, there is a chance you could harm your credit score in the process – even if you believe the new card will better suit your needs.

This is because each time you submit an application for credit, a new enquiry is recorded on your credit file. Having a large number of credit enquiries on your file could show lenders that you aren’t in control of your finances or are otherwise desperate for credit.

However, if this is the first time you’ve switched cards, there’s a chance it might not have an impact on your credit score at all. Plus, there are plenty of valid reasons you might want to jump ship, such as securing a lower interest rate or switching from a basic low-rate credit card to one that can earn you rewards.

Weighing up the pros and cons and considering your own personal circumstances is the best way to decide what’s right for you.

2. You’ve only had it for a short period of time

If you’ve only had your credit card for a short period of time before cancelling it, you won’t have the opportunity to demonstrate to lenders that you are a responsible long-term borrower.

Additionally, closing your credit card after only a short time could lead lenders to believe that you don’t trust your own spending habits.

Even if you took out your credit card for a specific reason, such as to have some extra spending money on your holiday, and no longer require it, it could be worth considering holding onto it for a bit longer.

Just keep mind that even if you aren’t using it regularly, you will typically be charged some sort of fee to keep your account open, such as an annual fee.

3. It’s your only form of credit

Since the introduction of comprehensive credit reporting, both negative and positive information is recorded on your credit file. Negative information could include late payments or over applying for credit, while positive information could be consistently paying your bills on time over a long time period.

Comprehensive credit reporting gives you the opportunity to prove to lenders that you are a responsible borrower. If the credit card that you are thinking about cancelling is your only form of credit, you will no longer be able to demonstrate this, meaning lenders may have less confidence in your reliability.

In what instance might cancelling a credit card benefit your credit score?

There are also a number of circumstances in which cancelling your credit card may be beneficial to your credit file, including the following:

1. You often find yourself tempted to use it on unnecessary purchases

If you feel that having access to credit could lead to the temptation of making unnecessary purchases, cancelling it might help you avoid building your debt up to an unmanageable level, causing late or missed payments.

If you were to hang onto your credit card in this instance, you could cause damage to your credit score.

Remember, if you are experiencing financial strain, you can reach out to the National Debt Helpline to receive free advice from a financial counsellor.

2. You want to improve your debt-to-income ratio

Your debt-to-income ratio is the amount of debt you have in comparison to your overall income.

The thing with credit cards is that even if your balance owing is zero, lenders tend to consider the entire credit limit of your card as a debt. This is because since you have access to that amount of money, you could technically decide to spend it all at any given moment.

In order to comply with responsible lending conduct obligations, lenders take your debt-to-income ratio into consideration when deciding whether to approve an application for credit.

So, if you’re planning to apply for a substantial loan, like a home loan, it might be worth considering improving your debt-to-income ratio by eliminating unnecessary credit cards. Alternatively, you could request to have your credit card limit reduced.

3. You have multiple credit cards or other credit products

If you’ve paid off one of multiple credit cards and you’ve simply got no use for it, it could make sense to cancel it, and it’s unlikely that doing so will have much of an impact on your credit score. The main reason for this is that you still have other forms of credit in use that tells lenders what kind of a borrower you are.

How to make the right decision for you

At the end of the day, the decision you make should be based on your own personal circumstances and what will put you in a better position. The best way to do this is to consider all of the consequences you may face by cancelling your credit card and weigh up the pros and cons of each.

For more information specific to your personal financial situation, consider reaching out to a financial adviser.

Did you find this helpful? Why not share this article?

Fact Checked -

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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Learn more about credit score

Does a credit score check impact your credit score?

You may have heard that when a bank or lender performs a credit check, that it can impact credit score. But checking your own credit score isn't the same, and won't affect your credit score in the same way.

There are two types of credit checks that can be recorded in your credit history: hard credit checks and soft credit checks.

Hard credit checks occur when you apply to borrow money from a bank or lender, such as when you apply for a credit card or loan. A soft credit checks occur when your credit file is accessed outside of applications to borrow money, such as when you check your own credit score or credit history.

Checking your credit score is a request for information and not an application to borrow money, so it should not affect a lender’s decision to accept or decline your credit applications. As such, it's a soft credit check, and is unlikely to affect your credit score, positively or negatively.

 

What are some advantages of a good credit score?

You should know about the advantages of credit score improvement as there are many occasions when having a good score is helpful. If your credit score is categorised as good, very good, or excellent, it can indicate you have strong borrowing power. This may encourage lenders to give you special discounts on interest rates and other loan terms. You may also find it easier to get approved for a credit card or a property rental. You can also try to negotiate terms using your superior credit score as leverage.

A high credit score indicates that you are financially responsible, but it requires you to be disciplined. If you currently have a good credit score, you still need to remember not to apply too often for credit cards or loans as these can quickly pull down your score. On the one hand, you may have better access to credit, but your good financial habits mean that you may not need to access this credit. Having some credit products can help build up your credit report, and therefore your credit score. You would just need to keep the debt and limits to a minimum and pay the bills on time. It’s never advisable to take out credit that you can’t afford to pay as it negatively impacts your credit history.  Even if you have a good credit score, you can always improve it further.

Does borrowing money affect credit score?

Whether it’s through a home loan, a personal loan, or a credit card, borrowing money will affect your credit score. Taking on a home loan or a credit card may have a positive impact on your score, but too many loan applications can bring your credit score down.  

Every time you apply for credit, an inquiry is performed against your name. Too many inquiries can reflect negatively on your credit report, and if your loan application is rejected it will negatively impact your credit score.

How you handle your debt can also make a big difference. As long as you make timely payments you may be able to improve your credit score and overall creditworthiness. However, any missed or delayed payments will likely result in a negative impact on your credit score.

Why should I check my credit score annually?

You may not need to get your free credit rating every year, but it can help you stay informed. A yearly free credit report can help Australians keep track of the impact of various financial transactions on their credit score.

Your credit score helps inform financial organisations, particularly lenders, about the sort of payer you are. Depending on how you've paid down debt in the past, it will have affected your credit score in various ways. In Australia, the inclusion of Comprehensive Credit Reporting (CCR) means that you can find out which transactions affect your credit score positively, as well those that have a negative impact.

Because of this, you may want to consider getting a free credit report once a year irrespective of whether you’re planning to apply for a loan or take on other debt. Checking your credit report can tell you if there are errors in your credit file, which affect your credit score and need to be corrected.

How regularly does your credit score change?

There are plenty of things that can affect your credit score, but when they'll impact it can vary wildly, and often depend on when the information has been passed on.

Every credit enquiry is noted on your credit file, and this impacts your credit score. Thanks to Comprehensive Credit Reporting (CCR), it means you both positive and negative transactions can impact your score, but so, too, can the frequency. For instance, if you apply too often for credit cards or apply with multiple lenders for a home loan and aren't successful, you may see a decline. 

How long this information take to pass on is an important question, but the length of time often depends on the credit reporting agency. Some transactions can take a small amount of time, while others take much longer. For that reason, it's important to check your credit history regularly so you can be more aware of what your credit score looks like, and if you need to correct any of the statements made on it. 

What if your credit score has dropped for no reason

The importance of checking your credit score regularly is hard to overstate as the changes may not be as relevant to your life, and there may be the occasional error, but what should you do if it drops for no reason?

Credit reporting agencies calculate your credit score based on the information they receive from lenders, banks, credit card providers and utility companies, among others. This report takes into account both the credit enquiries these companies make, as well as your payment history with them, and may include other factors. But because some reports may come in at different times, delays can appear like drops. 

Suppose you missed paying a bill while on holidays and the supplier couldn’t reach you, or something like it -- in this instance, the provider may report the default to the credit reporting agency, which can cause your credit score to fall when the credit reporting agency eventually sees the information. Because of an obvious delay, the drop can seem random.

Regularly checking your credit score and the transactions that have appeared can provide some understanding as to why a credit score drop might have occurred, and even provide some understanding as to how you can fix the drop, improving your credit score in the process. 

How does my credit score affect the interest rate offered by lenders?

When you apply for a loan, lenders will typically access your credit history. By studying your credit report, they can not only estimate whether you are a reliable borrower, but also calculate the maximum amount you can borrow and repay completely before the loan term expires. Your credit report can also tell lenders about the other kinds of debt you’ve taken and whether you earn enough to make additional repayments. 

If you don’t have too much outstanding debt, or if you’re managing your current level of debt well, you’re more likely to have a higher credit score. For some credit products, lenders usually offer a lower interest rate for applicants with a fair credit score. If they don’t, you can always try to negotiate it, given your higher creditworthiness. You should remember that asking for a lower interest rate may not affect your credit score, but applying for the loan certainly has an impact.  

What is a good credit score?

Across Australia's major credit score providers, Experian and Equifax, there are five tiers, ranging from "below average" to "fair" to "good", "very good", and "excellent", with your score designating where you sit. As the tiers suggest, an Experian credit score between 625 and 699, and an Equifax credit score between 622 and 725, is technically considered to be in the range of "good". Anything above this is even better.

However, lenders will typically favour the borrowers with the highest credit scores which means that applicants with a "good" credit score may not be offered an interest rate as competitive as one offered to a borrower with a "very good" or “excellent” credit score.

Can I check my credit score without a driver's license?

In Australia, your driver’s license is the preferred identification document for credit reporting agencies. This means you may not be able to confirm your identity using another document, such as a proof-of-age card. You may have genuine reasons like concerns over identity theft for not wanting to provide your driver’s license number. Unfortunately, most credit bureaus won’t allow people to check their credit score without a driver’s license. 

If you don’t have a driver’s license, there’s a good chance you haven’t applied for credit in the past and don’t have a credit score at all. In case you are concerned about identity theft, credit reporting agencies can offer you paid packages that include insurance against identity theft. Such packages may also include monthly credit score checks or alerts whenever your score is updated.

Where can I check my credit report for free?

While you can get a free credit report in multiple ways, RateCity's own credit checking system allows you to find your score from two credit history systems, Experian and Equifax. 

When you request your free credit report, you'll likely need to supply some personal information, such as your name, contact details, and a personal identification, such as a drivers license number or another form of identification. 

Not only does a credit report show credit score, but it usually often contains positive and negative credit transactions covering the past five years of payments. 

Why your credit score may differ between Experian and Equifax

Two of Australia's biggest credit reporting bureaus are Experian and Equifax, and while they both do the same thing, it’s not uncommon to find that your credit score can differ significantly.

Firstly, Experian and Equifax each have their own credit reporting algorithms to interpret and quantify your personal credit history. That means that while they do the same sort of thing -- credit tracking and reporting -- they may not handle it in the same way. Your credit history may therefore be similar, but not identical between Experian and Equifax.

While neither reveals exactly how they work, each also likely work in different time frames, which means your credit history may be viewed differently between the two. One could look at the most recent, while another might be weeks apart. For this reason, scores can vary.

Finally, there are different scales at which they work, and depending on the types of transactions your credit history has seen, this may impact the overall result slightly different, thus making the scores different. 

Do you need a credit score to rent a property?

A credit score is used by banks and lenders to understand your financial health and wellbeing, but you may not be aware that it's used as a way for landlords to understand whether or not it's risky to get into a financial relationship with you.

When you’re looking to rent a property, your landlord may check your credit history to get a sense of your capability to pay rent in a timely fashion. Landlors may look at your history of repaying debts, and this as a benchmark to understand the likelihood of you paying your rent on time, or not.

 

Can a bad credit score affect rental applications?

A landlord may check your credit score to work out how trustworthy you are, and whether you'll pay your rental obligations on time. So, can a bad credit score cause you to miss out on renting property?

When looking at your credit score for rental applications, landlords may not see a low score as a reason to instantly reject applications. Some may be more generous, and could be willing to consider a tenant with a lower credit score, or even request some form of additional deposit to act as security against possible future problems.

Alternatively, you may want to consider asking a guarantor to co-sign your lease, which gives the landlord peace of mind as they have an alternate payment source if you cannot make payment.

What can impact my credit score?

Your credit score isn't set in stone and can change with every financial decision and action you take. While you checking your score is a soft check and won't impact the result, payments and other actions can affect the score. 

The very things that can impact your credit score include your payment history (late or on time), the age and type of credit you have and owe, your debt balance (both current and delinquent, if any), recent payment behaviour, the credit available to you presently, and if you have any court judgements or actions resulting form bankruptcy.

Australia's Comprehensive Credit Reporting (CCR) also tracks your positive payments, and allows your credit score to be impacted positively, as well.