The process of canceling your credit card can prove daunting if don’t know how to go about it. This can be further complicated by the effects of cancellation on your credit score. Lucky for you, the financial sages behind MoneyWizard can guide you through the entire process!
Read through this post to understand the effects of cancellation on your credit score.
What is a credit card?
A credit card is a card of payment that is issued by a bank to an account holder. It facilitates you to pay for good and services basing on the promise that you will pay the issuer of the card the amounts and any other charges. Your bank then sets up a revolving account that offers you a credit line. With this, you can borrow some cash to pay a trader or as advanced money.
What is my credit score?
Your credit score is a number that lies between 300 and 850. In Canada, this number is used to tell the creditworthiness of a consumer. When you have a high credit score, such as 700, you are considered to be a good borrower, as seen from the lenses of the lenders.
Your credit score is based on your credit history. This history includes how many open accounts you have, your total debt levels and your history of repayments. As such, credit scores help lenders to assess an individual’s ability to repay loans on time.
The easiest way to know about your credit score is by checking it out. And don’t worry—checking your credit score won’t lower it. You can even enjoy unlimited access to your score with TransUnion credit monitoring. Sign-up today!
What is the relationship between my credit card and my credit score?
The relationship between your credit card and your credit score cannot be underestimated. In Canada, your credit card greatly affects your credit score. This starts right from the application of the card to how the card is used and to how repayments are made. When calculating your credit score, there is a detailed scrutiny of how the credit cards are managed.
Your credit card affects your credit score in several ways. When you apply for a credit card for instance, it opens you to inquiries that are added to your credit file. These inquiries can be hard or soft. Soft inquiries do not impact on your credit score. However, hard inquiries are performed by lenders in order to decide whether to lend or to deny. This detailed scrutiny may affect your credit score negatively.
Credit cards also lead to an increase in your credit mix. A credit mix is a case where you hold only an installment credit. In this situation, a credit card increases the credit types that can be maintained which in turn affects your credit score.
What happens to my credit score when I hold a credit account for long?
It is assumed that when you hold a credit account for long, your credit score increases. This is only applicable if your accounts are kept active and you make timely payments without missing any. Keeping this in mind, opening a new credit card brings down the ages of your credit accounts.
The flipside is that models for scoring credit look at this age in their calculation of credit scores. Thus, if the age has been brought down by acquiring a credit card, it lowers the credit score. The only advantage is that having a new credit card increases your credit limit.
When my credit card is cancelled, does it affect my credit score?
Yes, it affects your credit score unless you cancel the credit card ‘safely’. When you cancel a credit card, the credit limit that is available on that account is lost. This makes the ratio of credit utilization to increase which is not a very good sign for lenders. This makes you appear like a risky borrower.
In addition, canceling a credit card lowers your account’s average age on your credit report especially if the account has been open for quite some time. One factor that affects the credit score is the account’s age. Closing an account that has been in good books for long lowers the account’s average age in your credit report and hence reduces your credit score.
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How can I cancel my credit card ‘safely’?
A credit card is considered to be canceled ‘safely’ if, in case of any outstanding balance, arrangements are made on how the balance will be cleared before cancellation. In the same vein, you should redeem any rewards that are outstanding so that they are not wasted.
The issuing bank’s customer service should be informed, in writing, of your intention to cancel the card. For the sake of records, you should request them to reply in writing. You should also inform any other authorized persons who use the card of your intention to cancel so that they can also destroy their cards. Thereafter, you can ‘safely’ destroy the card.
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