The question is deceivingly complicated. Even for the experts.
Why? Because your credit card is a line of credit, which means it’s tied to your credit score.
When I spoke with Julie Kuzmic, a senior product manager at Equifax Canada, she had to lay down a disclaimer before getting into the details. She warned me that explaining how a cancelled credit card impacts your credit score is, essentially, mind-boggling difficult.
She also said there’s no simple, definitive answer to how much your score will be affected, if at all.
The impact on your score is almost impossible to predict
Kuzmic began with this scenario.
If your entire credit history consists of only two credit cards, one that’s 15-years-old and another that’s five-years-old, the average age of your open accounts is 10. Close your oldest line of credit and the average age of your account drops to five.
When it comes to calculating credit scores, the older your accounts, the better. A drop in that average age is not ideal.
But — and here’s where it gets complicated — you don’t have just one credit score (more on that here) and there are many different algorithms that could be used to calculate these scores. However, not every algorithm uses the age of your accounts in its calculation.
There’s also no way of knowing which credit score algorithm will look at the age and which one will ignore it completely.
Like I said: complicated.
Basically, if you and I each have two credit cards that are the exact same age and we cancel the exact same one, my credit score might not change at all while yours could take a significant hit.
It’s all up to the credit-score-algorithm-gods.
Focus on your overall financial health instead
Like I warned at the beginning, there are no easy answers here. Your credit score may be affected by the closure of a credit card account; it may not. Kuzmic herself said she can’t really advise one way or another.
But she did share this valuable insight: Canadians should focus on the bigger picture instead.
“Every time I go down this path and try to explain this, the bottom line is that the intent of your credit score is to give lenders an idea of the level of risk you pose,” she says. “But all you have to do to get a good score is pay your bills”.
She explained further: “If you have good payment history, closing a credit card account that has a long history and being left with one that has a shorter history is unlikely to cause a major drop in your credit score”.
The keyword is unlikely.
If you’re doing everything else right, your credit score will emerge unscathed. And doing everything right means making your payments on time, keeping your credit utilization ratio low (that’s the amount of debt you carry versus your credit limit) and avoiding applying for too many credit products.
That means if you have a card you no longer want to use, and all else is in good standing, go ahead and cancel it. Sometimes it doesn’t hurt to move on to to a better card.