Don’t cut up that card yet! How closing a credit card can drag your credit score. Here’s how to minimise impact

Closing a credit card might seem like a simple and straightforward financial decision, especially if you are trying to cut down on unnecessary spending or avoid hefty fines and late payment fees.

However, in India, this move can immensely impact your credit score and your overall credit profile in a negative way.

That is why it is important to understand how to properly plan a credit card closure.

Let us take a closer look at how closing a credit card affects your credit score and how to manage credit card closures wisely to protect your credit health in India.

Impact of credit card closure on your credit utilisation ratio

It is important to always remember that your credit utilisation ratio is one of the most critical components of your credit score. This ratio represents how much of your available credit you are using. A higher ratio means you have a higher reliance on credit to survive, which is not liked by lenders generally.

For example, suppose your total credit limit across all credit cards is ₹1 lakh, and you close out on a card with a ₹50,000 limit. In that case, your available credit suddenly drops, potentially increasing your overall credit utilisation ratio.

Higher credit card usage clearly indicates credit dependency and over reliance, which signals serious risk to lenders. Generally, experts suggest that one should focus on maintaining a credit ratio below 30% to keep one's credit profile and credit score healthy. That is why a sudden and unannounced jump in credit utilisation ratio due to a card closure can negatively impact one's rating and credit profile.

Limited credit history can negatively impact your credit score

Your credit history and its length are key components of your credit score. Older accounts show financial stability, good credit health and consistency over time.

Hence, if you close an old credit card, especially one that’s been active for over a decade or so, then your average account age decreases immediately. While a closed credit card in good standing stays on your credit report for years, still, its positive impact on your credit score reduces with time.

Loss of a good payment record

Your payment history accounts for a large chunk of your credit score. If the closed card had a strong track record of timely repayments, closing it means removing an account that boosted your creditworthiness. This can slightly hurt your score, particularly if other open accounts don’t have such positive histories.

When should you consider closing a credit card?

Despite the risks, there are legitimate reasons to cancel a card:

• High annual fees with minimal benefits.
• Fraud or security concerns.
• Transitioning to a card with better rewards or interest rates.
• Compounding even minor leftover payments into huge sums.

Therefore, before closing, pay off the full outstanding amount. You can also consider a balance transfer to another card with lower interest. To reduce credit score impact, start with newer cards instead of older ones.

Tips to minimise credit score and credit profile damage

To avoid unnecessary impact on your credit score:

• Keep older cards open if they have no annual fees.
• Don’t close multiple cards at once.
• Monitor your credit score before and after closure.
• Try using the card occasionally to keep it active.

Conclusion

Finally, to conclude, closing a credit card definitely lowers your credit score by increasing your credit utilisation ratio, erasing positive payment records and reducing the length of your credit history under normal circumstances. Still, with sensible credit card planning and proper timing, you can minimise the impact and manage your finances efficiently.

Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit scores. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.