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Does closing a credit card hurt your credit score?

Woman cutting up her credit card

Does closing a credit card hurt your credit score? 

Closing a credit card account may impact an individual or business’s credit scores, depending on the nature of the closure. Any credit account closure can affect credit scores to some degree, as reporting bureaus look favourably on maintaining regular payments on these products, and you will subsequently have less information on file.  

If your account is closed due to negative payment behaviour, the impact will be more severe, as credit reporting bureaus use this information to inform lenders of your deteriorating creditworthiness.  

How do credit cards impact credit scores? 

A credit score reflects a credit reporting body’s assessment of an individual or business as a borrower. Because the bureau or agency is assessing future suitability for credit, any information concerning the payment of previous credit products forms a core component of their analysis.  

Credit cards provide the type of repayment history these reporting bodies rely upon to create a credit score. Demonstrating an ability to pay off a credit card balance in full and on time represents a sign of positive creditworthiness. Maintaining that account over the long term further reinforces that entity’s capacity to service a level of debt.  

That is not to say that you are guaranteed a high credit score based on positive credit card behaviour alone. Reporting bodies use a high volume of data, including phone account payments, court actions, loan repayment history, credit utilisation ratio, and ASIC notices to inform credit scores. Based on these factors, it is possible to demonstrate positive credit card repayment behaviour and still have a low credit score. 

Why might you want to close a credit card? 

There are many reasons you might choose to close a credit card account, including (but not limited to): 

  • Finding a product with a lower annual fee or applicable interest rates 
  • Relocation to another country 
  • Switching credit accounts to leverage rewards programs 
  • Reinforcing positive spending habits by limiting access to credit 
  • Environmental concerns surrounding card issuer, such as carbon neutrality 

Why else might a credit card account be closed? 

If there is an outstanding balance on the credit card account, and the lender considers you unable to service the repayments, it may be marked as a “charge-off” or “written-off”. But what does written-off mean? In such instances, the lender will consider the remaining debt a loss, and the account will be closed to further activity. 

As the account holder, you still owe the outstanding debt – they just don’t consider it likely to be repaid. The lender may pass it on to a collections agency to recoup what it can. Defaulting on credit card payments in this way will have a higher impact on your credit score than closure due to other circumstances, as it is a direct result of poor repayment behaviour.  

What to consider before closing a credit card 

  1. Will I need access to that credit in future? Without a credit card: you rely on liquid cash holdings for any expenditure. Retaining access to a credit card account offers a safety net in some instances if available cash levels drop. 
  2. Will I lose any perks or rewards points? If you have a rewards credit card or one with associated perks, consider utilising any outstanding points prior to closing the account (or see if they can be converted into cash).  
  3. How could this affect any insurance policies? Some credit cards offer complimentary insurance, such as international travel insurance. If you rely on these insurances or have a holiday upcoming – keep this in mind.  
  4. Can this affect future travel plans? There may be complications if you make a booking with a credit card account that you subsequently close. For example, a rental car dealership may wish to confirm your card in person on arrival at your destination.  

Closing credit card impact on credit score 

So, does closing a credit card impact credit score? Yes. But it varies as to how much. The level of impact credit card account closure has on credit scores depends on the nature of the closure and your history with that product.  

If you display positive repayment behaviour throughout using the account, the impact on credit scores with the different reporting bodies may be minimal. As bureaus look favourably at maintaining active credit accounts, there may still be some negative impact despite this history.  

If the credit card account is closed or struck off due to negative repayment behaviour – the impact on credit scores will likely be more severe. The credit reporting body sees that history as a sign of poor creditworthiness and will communicate that to future prospective lenders in the form of a lower score. 

How to close a credit card without hurting your credit score 

Some of the credit history is already in the books. Your repayment behaviour over the life of the credit card account will inform your credit scores in some fashion, despite how you ultimately close the account. That said, you should ensure that no outstanding balance exists. Defaulting on credit card repayments is a sure-fire way to reduce your creditworthiness quickly.  

If you are unsure of any outstanding obligations on your credit card, contact the issuer to check the state of your account. Tying up all loose ends neatly will help mitigate any impact on your credit scores. You may also explore other credit card products available, as the credit scoring entities can respond favourably to maintaining active credit products.  

Credit checking for businesses 

Just as a lender needs to know if a customer defaults on any credit product, you need to know if a trading partner is liable to default on their payments to your business. Cash flow is king, and when trading partners fail to pay – you can quickly face default or insolvency.  

Tools to assist you in managing credit risk include CreditorWatch’s RiskScore. Leveraging machine learning RiskScore draws from extensive business data to inform you of a business’s creditworthiness. Incorporating payment data from Xero and MYOB, it’s an essential tool to help you avoid risky debtors and late payments. Search any business via its ABN or ACN and reveal a score between 0-850 and a risk tier from A1 to F. The higher the score, the more creditworthy the business.

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Product Marketing Manager
Lucy joined the CreditorWatch marketing team in October 2022. With experience across government, media and SMEs she loves working with companies like CreditorWatch that enable businesses large and small to improve their processes and work smarter.
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