Your credit score is based on the details listed on your credit file, including information about both active and closed accounts. Any change to your credit file, including cancelling a card or reducing your credit card limit, could affect your credit score. But because a credit card is just one part of your credit file, its full impact depends on other things, like the number of credit applications you've made, the amount of credit you have, and the number of credit products you hold. So before you go ahead and cancel your credit card, let's take a look at 3 ways it could help or hurt.
Yes, it can affect your credit score in two ways.
When you cancel a credit card, you are reducing the amount of overall debt you have access to, which is seen as a positive and may improve your credit score.
If it is your only credit card, and you usually always pay off your balance on time each month, that could see your credit score fall. One of the key things credit reporting agencies assess is your ability to responsibly manage your money by paying off your debts on time over a prolonged period, and a credit card is a great way to demonstrate this.
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If you stop using your credit card, that won't make much difference to credit reporting agencies – unless you were struggling to make your repayments on time, in which case no longer using the card will help you get your debt under control.
This is because debt-to-credit ratios are not a factor for credit scores in Australia, because our credit files only show the maximum amount of credit available (i.e. your approved credit limit for a credit card). They do not show the balance of our debts.
For instance, if you take out a credit card with a limit of $10,000, but the balance is $1,500, the only information the credit agency sees is the full limit: $10,000.
"No credit bureau can report the balance on credit cards or any other facility. The privacy act explicitly states which data elements can be collected and shared by a credit bureau, and balance is not one of them."
The main elements relating to a credit facility that a credit bureau can collect and share are:
So, your credit score is based on the total amount of credit you have access to, as well as repayment history and applications for credit. When you apply for a credit product, lenders may factor in the amount of credit you owe as well as your total access to credit, as part of their assessment.
Getting rid of a credit card doesn't always have an impact on your credit score. For example, if you've just got a new credit card and then closed the old one (or vice versa), it may not change your overall score.
It's also important to keep in mind that your credit score can fluctuate as more details are added to your credit file. So even if cancelling a credit card does affect your credit score in the short term, how you manage your accounts over time will play a greater role when it comes to getting approved for the cards and loans you want in the future.
Yes, reducing your credit limit is one way that you can improve your credit score and can be an alternative to cancelling your card altogether. Having a high total credit limit can impact whether you'll be approved for further credit and also damage your credit score.
If you have multiple accounts with unused credit or high limits that you're not using, consider consolidating your debts or reducing your credit limit to boost your score.
The more cards you have, the lower your debt to credit ratio (also known as your credit utilisation rate). Your credit utilisation rate is the amount of credit you're actively using, compared to the total amount of credit banks and other financial providers are willing to lend you. Having lots of credit cards could impact your borrowing power when you apply for a loan, as the amount of credit available to you has been gobbled up in credit card limits.
Also, the more credit cards you have, the more repayments and due dates there are for you to manage. Falling behind on your repayments and making late payments regularly can impact your credit score, so you should ideally aim to have the fewest number of cards and the lowest credit limits you need.
Yes, you can, but most Australian financial institutions limit you to one application for a credit limit increase every six months. Please note that you'll need to go through a credit check each time you apply for a credit limit increase.
Lower credit card limits didn't affect my credit score... Why?
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