Land use and land cover (LULC) changes have severely threatened ecological and economic sustainability in highland Ethiopia. A clear insight into its extent and rate is, therefore, a crucial step for effective land use planning and decision making. The main objective of this study was to analyse the nature of LULC change and its impacts in north‐western highland Ethiopia over the last four decades, using the integrated approach of remote sensing and geographic information system in combination with field data. Multidate Landsat images were used for spatio‐temporal change detection through the help of ArcGIS 10.3 and ERDAS IMAGINE 2014 software. A pixel‐based statistical analysis was used to measure class‐to‐class changes and total losses and gains of each LULC class during the study period. The results show that a significant and widespread change of LULC has occurred in the study area during the period 1973–2016. The cropland, grassland, and shrubland were the dominant LULC types taking more than 95% in total over the entire study period. The cropland and built‐up land showed a significant increase from 1973 to 2016, whereas grassland and shrubland decreased gradually over the same time period. The LULC change in the study area has caused severe environmental degradation, which in turn has affected ecological sustainability, agricultural productivity, food security, and rural livelihoods. The results of this study are expected to provide local‐level current information on the extent, rate, and impacts of LULC change for decision makers seeking to ensure ecological, social, and economic sustainability.