Nearly every decision you make and action you take related to credit — from loans and financing to the ever-popular credit card – can influence your credit report and credit score.

Lenders want dependable customers, so it's no surprise that a long history of prompt payment is looked upon favourably.

Some other decisions can be a bit more complicated like closing a credit card. Many questions may come to mind such as:

• Is it a positive or negative behaviour to close a credit card?
• Should I cancel all my credit cards?
• How do lenders view decisions around closing credit accounts?
• Is credit card usage the only thing that contributes to credit reporting?

Let's take a closer look at what can happen to your credit score if you decide to retire one of your cards and start answering the top 6 most frequently asked questions.

The impact of credit cards on your credit score

Understanding the relationship between a credit card account and your credit score is the first step to making an informed decision.

Each credit card account you open and maintain influences your credit score. As long as you regularly make payments on or before the due date and don't try to open a large number of them in a short period of time, the effect on your credit score will generally be positive.

This brings us to the first question.

1. Why should you not open multiple credit accounts or miss payments?
   A long credit history — at least one that isn't full of serious issues and concerns — is attractive to lenders. They love to see a potential customer who has proven themselves as attentive and responsible to apply for a loan or card.
   When you submit an application for, then receive and regularly use a credit card (as well as make at least the minimum payment each month), you continue to build your credit history in a positive way. And, because your credit report only contains the 24 most recent months of your repayment history, it's important to maintain good repayment habits for the sake of your credit score.
2. Is credit card usage the only thing that contributes to credit reporting?
   No. A credit card account is just one part of credit reporting, and of the credit score that condenses all of that information into a three- or four-digit number. Depending on your personal circumstances, credit history and many other factors, positive or negative changes related to one of your credit cards can be overshadowed by other credit-related events with a larger impact.
3. Does closing a credit account help or hurt my credit score?
   Credit reporting includes information on opening and closing accounts like credit cards. Certain actions related to credit cards can have a negative affect, including:
   • Applying for many cards in a short window of time: Excessive credit applications are a negative for a card issuer, and other credit providers, because these companies view restraint and moderation as positives. Sending out a bunch of applications all at once can make it look like you don't effectively manage your credit, or that you don't take risk into consideration. Each credit application leaves an enquiry on your file, and too many can drop your score.
   • Never applying for a credit card: We've already explained why a good credit history is important. While you don't absolutely need to apply for and properly use a credit card to build your credit history — many other types of credit, especially secured loans, can also positively impact your history when used responsibly — it's an effective way to do exactly that.
4. Is closing a credit card considered a negative or positive action for my credit score?
   It might surprise you to learn that closing a credit card falls into the positive category rather than the negative, but it all comes back to responsibility. When you close a credit account you have little use for, it shows lenders that you take care of your finances and aren't simply trying to increase your available credit.

Making an informed choice to boost your credit score

If you have open but unused credit cards, closing them is a relatively easy way to improve your credit score. By lowering your credit utilisation ratio through eliminating cards you weren't using anyway, you can enjoy the benefits without much, if any, change to your daily life.

Still, you should consider your personal circumstances and how a change could affect you, both related to and beyond your credit utilisation ratio.

Want to close out your unused card the right way? Moneysmart offers a step-by-step guide to make sure you don't run into any unwanted surprises when closing a card.

1. If I only have one credit card, does it make sense to cancel it?
   If you only have one credit card, it's probably best to keep it open, especially if you regularly use it.
   Having trouble making payments on your current cards? Closing one, or a few, might help in the long run. However, the root issue, and related impacts on your score, may be much more closely tied to overall financial management as opposed to your credit utilisation ratio. In this case, cutting back on and carefully tracking spending could be the biggest help.
2. Which credit card accounts should I keep open, and which should I close?
   Your oldest credit card offers the most benefits for boosting your credit score. You should prioritise keeping that credit card open, as long as it doesn't have an especially high interest rate and you've had a generally positive experience working with the issuer.
   When closing credit card accounts in general, you should look at factors like:
   • Credit limit: Target any credit card with a high amount of total available credit first, as too much unused credit can hurt your score.
   • Annual fee: An annual fee paid on an unused credit card is money lost for very little in return.
   • Terms and conditions: A high interest rate, or even a lack of perks like reward points schemes, can make it easy to identify the cards providing you with the least benefits.

Want to close out your unused card the right way? Moneysmart offers a step-by-step guide to make sure you don’t run into any unwanted surprises when closing a card.

Staying on top of your credit score

With all the factors that go into credit reporting — credit utilisation, new credit, number of accounts open and many more — monitoring your credit score is an easy way to track progress and identify potential issues.

You can check your credit score at any time for free with GetCreditScore.
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Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.