Cancel your old credit card without affecting your credit score

While going through your bank statements, you realise that one of your credit cards, which has been gathering dust at the back of your wallet, is costing you a surprising amount in annual fees. On top of this, you’re not making use of the rewards programmes that are linked to it.

Your first thought may be to close the account and get a more suitable card. However, after a quick Google search, you realise that closing it may have a negative impact on your credit score.

But this may not be entirely true. In fact, you may be able to close one of your credit card accounts without causing a dip in your credit score at all. We take a deeper dive into this, but we first find out why people decide to cancel their credit cards.

Unlike general bank accounts, credit cards have a credit facility that allows you to borrow money when you need to make purchases. However, you may find that you’re no longer gaining as much as you used to from one of your credit cards. These are some common reasons for closing a credit card account:

1. The benefits no longer apply to you

Credit cards offer many benefits, such as automatic travel insurance when you purchase flight tickets or a range of cashback options when you shop at certain stores. However, as you progress through life, not all of your credit cards will keep up with your lifestyle.

For example, imagine your older credit card gives you access to reduced gym fees and 50 complimentary text messages. However, nowadays, you’re going cycling rather than going to the gym and you use WhatsApp rather than text messages. The benefits you have no longer suit your needs.

2. The fees are too high

Even if you haven’t touched your old credit card in months, you’ll still be liable for the monthly service fee, which can cost you hundreds of rands.

On the other hand, let’s say you’re still using it regularly. Perhaps you’re transferring money and making payments from your account, or maybe you’re still subscribed to all the banking notifications. Unfortunately, nothing in life is free and you will pay a premium for these transactions.

3. Your card is being used fraudulently

When your old credit card is involved in blatant fraudulent activity, such as when it’s been stolen, then your bank will quickly cancel and replace it. However, if it’s being misused in a more complex or personal way, then it may be easier to simply cancel the card yourself and get a new one.

For example, imagine you have a subscription to your favourite news app, but when you decide to cancel it, months go by and you realise that they’re not respecting your request. Similarly, let’s say your son uses your credit card for “emergencies”, even though you have asked him to refrain from doing so.

There are many ways to address these problems, but it’s sometimes simpler to just remove the problematic credit card from the equation and get a new one.

When you cancel your old credit card, your overall credit utilisation will decrease. In turn, this will impact the percentage of credit you’re using.

For example, let’s assume you have three credit-bearing accounts, one of which is your old credit card. The first two accounts have a combined credit limit of R10,000 and your credit card has a limit of R10,000. This means that your overall credit limit is R20,000.

If you have spent R5,000 on your first two accounts, and only R1,000 on your credit card account, then your current credit utilisation is 30% – which is perfect if you want to build a great credit score.

Now, it seems logical that if you pay off the R1,000 on your credit card and shut it down completely, then your credit score should improve because you’re reducing your debt, right? However, when you permanently cancel your credit card, you also lose the R10,000 credit limit that comes with it. As a result, the debt from your remaining accounts will raise your credit utilisation.

Referring back to the above example, if you still owe R5,000 on your other two accounts and your remaining credit limit is only R10,000, then your credit utilisation rises to 50%. This will then have a negative impact on your credit score.

The secret to closing one of your credit cards without damaging your credit score is to manage your credit utilisation well. This means that you have to balance your remaining accounts with your new credit limit.

If we return to the above example, you could pay the final R1,000 on your credit card, as well as pay R2,000 towards your other accounts, and then close your credit card account. This will leave you with R3,000 debt and a R10,000 credit limit, which equals a total credit utilisation of 30%.

By considering all of your accounts as a whole, you can prevent your credit score from being negatively impacted. If you’re smart about it, you could even increase your credit score by ensuring that your overall credit utilisation goes down after you cancel your old credit card.