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The Implications of Cancelling a Credit Card: What You Need to Know

Are you considering cancelling a credit card to reduce your monthly expenses? You may be tired of paying fees on a credit card you never use. But think twice about cancelling a credit card. It can negatively impact your credit rating and do more harm than good. Here’s why!

a middle-aged woman sitting on her couch looking at her credit card and laptop

It Changes Your Credit Utilization Ratio

One factor determining your credit rating is the amount of available credit that you use. For example, if you have two credit cards with a combined credit limit of $10,000 and carry a balance of $5,000, your credit utilization ratio is 50 percent. Creditors and lenders like to see lower ratios — less than 30 percent.

If you cancel one of your credit cards, your available credit goes down. And if you maintain the same credit card use, you’ll eat up a larger percentage of your available credit, which is a red flag to lenders.

It Impacts Your Credit History

Another factor in your credit rating is credit history, as creditors favour people who’ve shown they can handle their finances for a long period. Having an active credit card that’s 10 years old or more can boost your credit score. So, if you’re getting a new card with more perks and you’re thinking of ditching an old card, reconsider. Keep the account alive by using it for automatic monthly payments for Netflix or utility bills.

Tips For Closing a Credit Card

While cancelling a credit card has drawbacks, you can do it while minimizing harm to your credit rating. Here’s how:

  • Increase the credit limit on your remaining cards to maintain your credit utilization ratio.

  • Pay the remaining balance.

  • Use any points, miles or rewards you’ve collected.

  • Cancel any automatic recurring payments you make with the card and transfer them to a new card.

  • Instead of cancelling a card because of fees, contact the credit card company and ask to switch to a new card with no fees. Your credit utilization ratio and credit history won’t change.

  • If you don’t receive a written notice by mail and still see the open account online, confirm the cancellation with the credit card company.

If you’re having trouble paying your credit cards, student loans, taxes or car payments, seek help from a licensed insolvency trustee who can assess your situation and recommend ways to re-establish your credit score.

Debt Help in Eastern Ontario and Across Canada

At D. & A. MacLeod Company Ltd., we can help you take control of your finances and get out of debt. Our debt assistance services can help you curb your monthly spending and credit card use. We help people like you across Canada through our virtual appointments.

Contact us today to schedule a confidential consultation with a licensed insolvency trustee.


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