Will Cancelling old credit card affect credit score?

One of the many aspects of personal finance that often raises questions is the impact of cancelling an old credit card on an individual’s credit score. It is a common concern among individuals who are looking to declutter their wallets or simply want to reduce the number of credit cards they possess. While cancelling an old credit card can have some short-term effects on your credit score, understanding the underlying factors can help you make an informed decision.

The first thing to consider is the primary reason why your credit score may decrease after closing a credit card: losing a credit limit and increasing your utilization rate. Your utilization rate is the percentage of available credit you are currently using. By cancelling an old credit card, you effectively reduce your total available credit, which, if you continue to use the same amount of credit, can result in a higher utilization rate. A higher utilization rate is typically seen as a negative factor by credit scoring models, as it may imply a higher risk of defaulting on debts.

However, it is important to note that this impact is not necessarily permanent. According to financial experts, if you continue to make your payments on time and maintain a healthy credit usage pattern, your credit score can rebound in a few months. The key is to keep your utilization rate low, even after cancelling the old credit card. This can be achieved by either reducing your overall credit card spending or increasing your credit limit on other cards. By doing so, you can offset the potential negative effects of cancelling a credit card.

It is also worth noting that the impact of closing a credit card can vary depending on individual circumstances. For instance, if you have other credit cards with high limits and low utilization rates, the impact of closing an old credit card may be minimal. On the other hand, if the credit card you are considering closing is one of your few cards with a high credit limit, the impact could be more significant.

Another important factor to consider when evaluating the impact of cancelling a credit card is the age of the account. Credit scoring models generally take into account the length of your credit history, and closing an old credit card could potentially shorten the average age of your accounts. This could have a slight negative impact on your credit score, especially if you have a relatively short credit history.

In conclusion, while cancelling an old credit card can initially cause a decrease in your credit score, the impact is not necessarily long-lasting. By maintaining a responsible credit usage pattern and keeping your utilization rate low, it is possible for your credit score to rebound in a few months. It is important to evaluate your individual circumstances and weigh the potential benefits of decluttering your wallets against the potential impact on your credit score.

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