Thinking of cancelling your credit card? Here’s what it does to your credit score

Credit cards are credit instruments. They help users in securing credit on the promise of making payments within the stipulated time as per the contractual commitments between the credit card user and the lending institution.

Now, cancelling a credit card comes with its own complexities, issues and problems. It can definitely impact your credit score, depending on factors such as: credit utilisation ratio, credit history length, any pending payments, past defaults and your overall credit mix.

In an exclusive conversation with Mint, Rohan Bhargava, Co-founder of CashKaro and EarnKaro discussed the concept of cancelling out credit cards and its implications for credit card holders.

He stated that, “Closing a credit card isn’t always a bad move, but it should be done strategically. It can impact your credit score by increasing your credit utilisation ratio, shortening your credit history, and reducing credit mix. 

For instance, someone with a credit score of 780 (considered excellent in India) could see a dip if they cancel an old, high-limit card. With credit card dues rising at a slower pace—15.6% this year compared to 32.5% last year—and both online and offline spending seeing a dip in February, it’s clear consumers are becoming more cautious.”

He further elaborated that, “If a card no longer aligns with your financial goals—say it has high fees or tempts overspending—evaluate if keeping it really adds value. The focus should be on responsible usage and maintaining a healthy credit profile rather than the number of cards you hold.”

When should you consider cancelling a credit card?

Now deciding on when to cancel your credit card can be a tricky call. Still, there are several crucial points that you should consider and keep in mind while taking the best decision in this regard according to your financial situation.

• High annual fees: Premium credit cards coming along with substantial yearly charges may not offer benefits that justify the cost. That is why, always consider the pros and cons carefully. Take a pen and paper and write down the actual annual charge you will pay maintaining a credit card. This will help you in taking an informed decision.
• Overspending habits: If a card encourages excessive spending leading to debt, cancelling it might help regain financial control. For this you need to carefully check and see for yourself how much are you spending using a particular card, surviving on credit is never a good idea.
• Managing multiple cards: Having several credit cards can be confusing and increase the risk of financial mismanagement and hamper financial growth. A lot of credit cards simply means a lot of credit lines, this opens up the potential of financial frauds, building up of debts along with a constant stress to follow up with your expenses. That is why you should always consider closing out avoidable credit cards to keep things under control.
• Implications of life changing events: Events such as divorce or separation may necessitate closing shared credit cards to simplify finances. This becomes important because of the threat of building debt quickly if the credit card repayment is not taken care of in a seamless manner.

How can you minimise the impact on your credit score?

To focus and minimise the impact of credit card closure on your credit score you are required to keep several crucial points in mind. These points are briefly discussed below:

• Clear off outstanding balances: Do ensure that all dues are cleared before you initiate the process of cancellation to avoid accruing any penalties and associated interest costs.
• Redistribute credit utilisation: Check and transfer balances or limits from the cancelled card to another active card. This will help you in maintaining a healthy credit utilisation ratio.
• Never close multiple cards at short notice: Do remember, closing several cards at once can significantly impact your credit utilsation and account age. That is why close cards after decent intervals to avoid damage to your credit score.
• If possible keep older credit cards active: This is important because retaining cards with long standing histories can be immensely positive for your overall credit profile and even boost your credit score.
• Carefully monitor and check your credit report: Post cancellation carefully check and verify that the closure is accurately reflected in your credit report and also check for any minute errors.
• Redeem reward points before closing the card: Check and redeem any accumulated points or benefits on the card before deciding on closing it. This is crucial as it will help you in extracting the best possible benefit from your credit card that has been built over months and years based on your payment history.

Therefore, by carefully considering these factors and steps, you can make informed decisions about cancelling credit cards while minimising potential negative effects on your credit score.

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.