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Does cancelling your credit card affect your credit score in Australia

Find out if cancelling a credit card can impact your credit score.

Does cancelling your credit card affect your credit score in Australia

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A credit rating essentially acts as your reputation as a borrower, which means that a low credit rating can lead to serious financial difficulties, such as potentially having loan applications denied and your interest rates hiked up. If you use credit cards, it is important to know what your credit rating is, check it regularly, and know what financial actions and transactions might positively or negatively affect your credit rating.

We have all heard the horror stories about credit cards, credit card debt and the ensuing terrible credit rating, but credit cards do not have to be the enemy. It is always wise to be cautious and prudent financially, particularly so when dealing with credit because your credit rating can determine the likelihood of your future loan applications being granted or denied. But you do not necessarily need to fear credit cards, or cancelling them, for that matter. These actions do not assure you a spot at the low credit rating table, it all depends on the particular situation.

The focus of this article is to help you as a credit card consumer understand factors that affect your credit score, so you can make good financial decisions that put you in good financial stead for the future.

It is commonly touted that closing or cancelling a credit card can result in your credit score being negatively affected, and in some cases this is true. However, cancelling your credit card does not necessarily mean that your credit score will be impacted, particularly if you follow a number of steps to ensure that you are cancelling your credit card in the right way thus limiting the impact on your rating.

Pay off your credit card

This sounds obvious, but it is the most vital part of your credit agreement. Before you can cancel your card, you must pay off the owing balance. If it is a joint account, both parties are responsible, however if you are the primary cardholder, it is solely your responsibility. If you are struggling to pay the balance, you need to talk to your provider or a financial advisor immediately. In many cases, the wisest decision is to transfer your balance to another card, minimising the amount of cards you have, however this may affect your credit score negatively.

If, by chance, you have a credit balance, you can simply ask for a refund by having the credit provider transfer the balance to an account which you are leaving open.

Cancel automatic payments and direct debits

This goes along with paying off your credit card, but you would be shocked to learn how many customers get stung by fees, interest and lower credit scores because they forgot to halt direct debits from their accounts. Do not make this mistake. Pay off the credit card and stop direct debits.

Cancel the card and receive confirmation

Cancelling a credit card is easy enough to do, but it needs to be done the right way, while being sure to cover all bases. You can usually cancel your credit card online, over the phone or in person at the appropriate bank, but no matter what you do, make sure you confirm that the account has been closed and receive the appropriate documentation (a written confirmation and final statement) which says as much.

Check your credit score before and after cancellation

To know how cancelling your credit card will impact your credit rating, you need to check your credit score, and then check it again once cancellation has been confirmed. This may take some time to process, so make sure you consistently check it.

You do not want to be closing a credit card for no reason, however, in some cases, cancelling your credit card may actually benefit your credit rating, particularly if you have a problematic track record of borrowing, have been unable to keep up with repayments and have outstanding debts.

If it removes a high credit limit

Having multiple credit cards with high credit limits is a fast way to get yourself into financial trouble, particularly if you are not consistent with your repayments or have a track record of extensive borrowing across all of the cards. In this case, consolidating your debt and cancelling a credit card safely could actually improve your credit rating as you will appear to lenders to be at lower risk of defaulting or being late on repayments.

It can also be helpful to cancel a credit card if the company changes your account terms, adding extra fees, annual fees or higher annual percentage rates (APRs).

If it shows your settled outstanding payments and debts

In a similar vein, when cancelling your credit card, it is essential to settle outstanding debt. This is highly favourable for credit ratings, and may lead to an increased credit score. It is better to pay off outstanding payments and cancel a credit card than not pay it off and keep the credit card open.

If it helps you fulfil other payments on time

Consolidation is an important part of repayments. If you have money owing, and it is scattered across many different cards, lenders will view this as disorganised, frivolous spending and your credit rating may reflect that. As mentioned above, making regular repayments and avoiding fees and rising interest is the predominant factor in maintaining or even improving your credit rating. If you cancel a credit card, consolidate your debt and begin paying off that debt, your credit card rating may get better in turn.

There are plenty of good reasons to cancel a credit card, which include separation or divorce, high annual fees (particularly on a card you do not use), and perhaps even lack of discipline with spending. In these cases, it may be best to cancel your credit card, but it is still ideal to do this in the right way so as to limit the amount of impact that action has on your credit rating. If you go about it the right way, pay off outstanding payments and keep your other credit account payments up-to-date, cancelling your credit card should not be too big of a deal.

It is important to know the best ways to use your credit card to prevent you from making common mistakes that can affect your overall credit score.

If you have a high amount of recent credit applications

The more credit applications you make (particularly across numerous credit cards), the more of a risk you are. Credit card companies may look unfavourably towards your attempts to cancel your credit card if you have numerous credit cards, many applications and a bunch of outstanding payments. It will look to them as though you have bitten off more than you can chew, which will not shine your credit card cancellation in a good light.

If you don't have any other credit accounts?

This one may sound strange, but if this is your only credit card, lenders may not have enough information regarding your credit history. This could lead to you getting a lower credit rating simply because of the cancellation being the only information the credit card company has. A better decision might be to reduce your overall credit limit, which reduces risk to lenders and may elevate your credit rating.

If you still struggle to make payments on your other accounts

Struggling to make your repayments is not a good reason to pull the pin on your credit card - at least not without consolidating your debt first. If you cancel a credit card which you are struggling to make repayments on, not only does this not cancel the balance owed, but lenders will still need to make payments, interests will still accrue and your reputation as a borrower will be damaged, which will be reflected in a lower credit rating.

If you are making repayments regularly and without problem, the best course of action may be to keep your credit card accounts open. However, if you are determined to cancel your credit card or cards, either because you are separating or divorcing your partner, committed to changing spending habits or procedures, or have settled your outstanding payments and wish to reduce your borrowing or consolidate debt, make sure you follow the appropriate steps to ensure that your credit rating is not negatively affected in the process. You should do everything within your power to make credit cards and your credit rating work for you, not against you.

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