We’ve probably all found ourselves trying to decide whether or not to cancel a credit card. But, before you jump in and do something stupid, understanding how canceling a credit card can affect your credit is necessary to see if it’s the right solution for you.

Why your credit score matters

If you’re unfamiliar with credit scores, let me explain. It’s a number between 300 and 900 that credit reporting bureaus in Canada such as TransUnion assign to you.
The higher your number, the better. This is important because if you plan on getting a loan in the future, lenders will want to know how responsible you are in paying off your loan. Generally speaking, if your score is over 600, you are in good shape. But every lender has different criteria when approving loans, and your credit score is just one part of that process.

How your credit score is calculated

Let’s have a look at the formula for calculating your credit score. First, remember that credit is a mechanism that allows you to pay for anything without having the cash in your wallet, as long as you pledge to pay it back. Examples include Credit cards, lines of credit, mortgages, and student loans. (See also: Types of Loan: Which one is right for you?)

Your credit score is determined by how you use credit and is computed using the following criteria:

• payment history
• Use of available credit
• Length of credit history
• types of credit

How canceling a credit card affects your credit score

If you’re considering canceling a credit card, there are two ways this action can affect your credit history and score. First, if it’s your oldest card, closing the account will affect the length of your credit history. However, even after canceling a credit card, the account will continue to appear in your credit history for approximately 7 years. As a result, canceling your oldest credit card account would not immediately affect the length of your credit history. However, the effect this would have would depend on the age of your other credit cards.

For example, if you cancel a 5-year-old credit card and leave open a 2-year-old credit card, after 7 years, when the canceled card is removed from your credit history, you will still have a credit card with 9 years – and that’s great. But if you hadn’t canceled the other credit card seven years later, you’d have a 12-year-old credit card – and that’s even better. In that case, canceling the older card could hurt your credit score. Therefore, it is always better to keep your old card open.

(See also: How To Cancel Your Credit Card Without Hurting Your Score).

One factor that can immediately impact your credit score when canceling a credit card is your credit usage. To maintain a good credit score, it is advisable to use no more than 35% of your available credit at any given time. For example, if you have two credit cards, both with a credit limit of $5,000. And between the two, you have a balance of $3,000. Your credit utilization will be 30% ($3,000 /$10,000).

In conclusion

Canceling a credit card won’t do as much damage to your credit history as a default. However, if you want to cancel any of your credit cards, you should prioritize those with a low credit limit or the new ones.