Your credit score is made up of many factors and is constantly changing and updated. Sometimes our credit score will fall, at other times; it will increase or stay the same. As Canadians, we all know that our credit report and score needs to be healthy in order to obtain loans, mortgages and get lower interest rates.
A few weeks ago, I received an email from a reader asking about what happens when she pays off her credit card and decides she doesn’t need it anymore and closes it. She had heard that it was better to keep it open so that her credit score will not be impacted.
Well, in some ways, anything you do will affect your credit score – this includes closing a credit card. What is more important is trying to figure out if closing an account will affect your score negatively. In general, closing a credit card is a positive thing. You will have one less card to worry about and you will decrease your overall potential to spend. When closing a credit card, here’s how your score can be affected,
Increases your credit score
- Your overall debt level is decreased
- Number of revolving credits are lower (banks see this as a positive. You’ll have less credit limit and in affect potentially be in less debt)
Decreases your credit score
- Closing an old credit card with a good trend line – creditors like to see that you have been paying your bills on time for a long time. If they only see credit that is recent, it doesn’t provide them enough of a history to assess you.
- A credit card that is closed because of a charge off or unpaid debt will impact your score negatively
- Reduced credit mix – if you only have one credit card and you close it, it will reduce your overall credit profile and lower your score. Having 2 credit cards and 1 car loan is better than having 5 credit cards.
In general, it is suggested that Canadians should carry 2-4 cards max. This could include two major credit cards such as a VISA or MasterCard and two department store cards like a BestBuy or a gas credit card (CanadianTire). In addition to credit cards, a healthy credit report will show that you have different types of loans in addition to credit cards. This can include things such as a car loan, a mortgage or even a student loan. So if you are considering closing a credit cards, I say go for it!