How can I make credit notes cancel out their invoice?

A credit note will either be for part of an invoice or the full total.

While they may seem like different situations, both cases needed to be treated the same. You need to always create a remittance and reconcile everything.

Part credit example

You've created an invoice for £100 and then raised a credit note against it for £25. You receive a payment of £75, so create a remittance for your contact with both the invoice and credit note included to mark them as paid. The remittance will have a value of £75. Then simply reconcile your bank transaction to the remittance.

Full credit example

You've created an invoice for £100 and then raised a credit note against it for £100. You'll not receive a payment, but you need to create a remittance for your contact with both the invoice and credit note included to mark them as paid. The remittance will have a value of £0. To reconcile, include the £0 value remittance when you come to reconciling a different remittance - just so it gets ticked off as reconciled.

Alternatively, if you don't like the idea of having a £0 value remittance, instead of "bundling" the two remittances at the point of reconciling, you could do it when creating the remittance. For example if you also had an invoice for £200, you would create the remittance for £200 with both invoices (totaling £300) and the credit note (-£100) included, meaning you just have the one remittance to reconcile.