There are few better feelings than clearing a credit card balance. If you don't plan to use the account again, you may want to close it straight away.
Understanding your credit score#
When you apply for credit, the lender assesses your creditworthiness — how likely you are to repay in full and on time.
We'd rather talk about credit health, which is something you can build. Demonstrate that you handle borrowing well and access follows.
Your score is a number representing that health. Credit reference agencies — Experian, Equifax and TransUnion — gather your financial history from lenders and maintain a file covering every credit account you hold or have held.
Each agency shows you a different score, because they calculate differently. Lenders also use their own scoring systems — when they run a credit search, they receive the information from your report to feed into their own decision.
What affects your score#
Your score is built from public and private sources — the Electoral Roll and court records on one side, your credit history on the other. What appears in that history depends on whether your lenders have reciprocal data sharing agreements with the agencies. That simply means two companies agreeing to share data with each other.
Account types that can affect your score:
- Mortgages
- Credit cards
- Loans
- Overdrafts on bank accounts
- Mobile phone contracts
- Store cards
- Home shopping accounts
- Debt collectors
- Car finance
- Utility bills, depending on how payments are set up
- Rent payments, only if the landlord is in a rent reporting scheme
Old data eventually disappears. Credit agreements older than six years drop off your report once closed — good news for adverse entries, less so for well-run accounts, since those fall off too. Which is why maintaining your credit health continuously matters.
Some things never appear at all: Council Tax, your income, employment details and student loans.
What happens when you close a card#
Within the first 14 days, you're legally entitled to cancel a credit agreement — the Right to Withdraw. The account may still show on your report but shouldn't have any negative effect on your score. The credit application search will remain. If you've used the card in those 14 days, you'll need to return any outstanding balance before it can be closed.
If you've used the card, kept up repayments and stayed within your limit, positive markers get reported — which is good for your score. Even so, you may reach a point where you want to close it.
There's a chance that closing causes a small drop.
Why your score dropped#
Three things happen at once, and none of them mean you've done something wrong.
Open accounts carry more weight. An open account with good history influences your score more than a closed one with the same history.
Your credit utilisation rate rises, because your total available credit has shrunk. Keeping utilisation up to 30% shows lenders you borrow a moderate amount without over-relying on credit.
You lose an old account. Account age matters, so closing a long-held card with positive history can cause a temporary drop — longstanding credit relationships count in your favour.
Which is why it can be worth leaving an unused card open, so your utilisation stays low and healthy accounts remain on your file.
Closing a card with poor payment history#
Missed payments will already be affecting your score. They remain on your report, though their relevance to lenders diminishes over time, and the payment history is typically removed six years from the date of account closure.
Credit card companies usually won't let you close an account until outstanding debt is paid off. The same applies to bank accounts with overdrafts. If you want to close an account but are struggling to pay, contact the lender to arrange a payment plan.
Closing other types of account#
The same rules apply to loans, overdrafts and mobile phone contracts. Open accounts have more influence than closed ones, so a temporary reduction is normal.
Don't let that deter you — lenders take all the data on your report into account when deciding on future applications.
Closing a bank account. Not all bank accounts appear on your report, since they aren't a traditional form of credit, so closing one usually has no impact.
The exception is an account with an overdraft facility, which is a credit agreement. You'll need to clear the remaining balance first. If the account is in good standing, closing it shouldn't have a long-term effect, though you may see a temporary drop as with a card.
The key things to remember#
- Cancel within 14 days under the Right to Withdraw and there's no impact.
- Closing an established card causes a small, usually temporary drop.
- Three causes: open accounts count more, utilisation rises, and average account age falls.
- Keep utilisation up to 30%.
- Closed agreements drop off after six years — good entries as well as bad.
- Poor payment history clears six years from the date of closure.
- You usually can't close an account with outstanding debt.
- Bank accounts only affect your score if they carry an overdraft.