Does Closing a Credit Card Affect Your Credit Score?

When considering closing a credit card, it is important to understand how this action might affect your credit score. Closing a card stops new activity from being reported to the credit bureaus, though the account history may remain on your credit report for up to 10 years. This can still affect your credit score in several ways.

Closing a card reduces your total available credit, which can increase your credit utilisation ratio. It may also lower the average length of your credit history over time. Both factors can negatively affect your credit score. 

You need to evaluate these potential impacts carefully before making the decision to close a card.

• Closing a card can raise your credit utilisation ratio

• It lowers the average age of your credit accounts

• May reduce your overall credit mix

• Close cards only if fees is high or it encourages overspending

• Keep your oldest and no-fee cards active

• Pay off dues and cancel auto-payments before closing

• Better options: downgrade or use it occasionally

• Smart credit use improves your credit score

Your credit score is closely linked to your credit card usage. Various factors affect your score, including:

• Repayment History Matters

Your credit card repayment habits directly affect your credit score. Paying the full outstanding amount on time helps improve your score. Regularly paying only the minimum amount or missing due dates can lower your score. Payment defaults damage your score more significantly than occasional late payments. 

Clear your dues on time to build a strong credit profile.

• Credit Utilisation Ratio

This ratio indicates how much credit you use compared to your total credit limit. Calculate it by dividing your total outstanding by your total credit limit, then multiplying by 100 to get a percentage. Maintaining this ratio below 30% supports a healthy credit score.

High usage shows over-dependence on credit and may reduce your score.

• Credit History Length 

An older credit card account demonstrates to lenders how long you have been handling credit. Closing such an account shortens your credit history and may negatively affect your score. You need to keep long-term accounts active to establish a stable credit record.

• Number of Credit Cards and Impact

Having a few well-managed cards increases your total credit limit and lowers your utilisation ratio. However, holding too many cards can complicate payments, signal financial strain, and potentially reduce your credit score. Managing several payments becomes challenging and may indicate financial pressure.

Limit yourself to a maximum of three active cards to maintain simplicity and stability in your credit score. 

In certain scenarios, closing a credit card may seem to be a sensible decision, but it can negatively impact your credit score in several ways. Here is how cancelling a card can affect your credit profile:

• Increases Your Credit Utilisation Ratio

Cancelling a card reduces your total available credit. This leads to a higher credit utilisation ratio, and using more than 30% of your available credit can harm your score.

For instance:

You hold two credit cards with limits of ₹50,000 each, giving you a total limit of ₹1 Lakh. If you typically spend ₹30,000 a month, your utilisation stands at 30%. Once you cancel one card, your total limit becomes ₹50,000. 

Spending the same ₹30,000 now results in a utilisation ratio of 60%, which can significantly reduce your credit score.

• Lowers Your Average Age of Accounts

Cancelling an old credit card brings down the average age of your credit accounts. Maintaining a long and healthy credit history improves your score, so losing an older account may weaken it.

For instance:

You have a credit card that you have used for 8 years and another card for 2 years. The average credit age is 5 years. Cancelling the 8-year-old card reduces this average to just 2 years, which can affect your score since lenders prefer longer and stable credit histories.

• Could Reduce Your Credit Mix

Credit bureaus consider a balanced mix of credit types such as credit cards, personal loans, and home loans favourably. Cancelling a credit card can reduce this mix and cause a slight drop in your score. While credit mix plays a smaller role (10% weight in your score), reducing types of credit accounts could affect your score over time.

For instance:

You hold a personal loan, a home loan, and two credit cards. This reflects a healthy credit mix. Cancelling one of your credit cards reduces this diversity. While the impact may not be immediate, it can gradually lower your score, particularly when no other similar credit accounts remain.

Closing a credit card affects your credit score. It is important to think carefully before taking this step. Here are a few situations when closing a card might be a sensible decision:

• Difficult to Manage Multiple Cards

Too many cards can make it hard to track spending and payments. Closing some can help you stay organised.

• High Annual Fee, Low Value

Paying a high fee for limited benefits does not make sense. Closing such a card can save money.

• High Interest with Carried Balance

A high interest rate increases your debt if you do not repay it in full. Consider closing the card to avoid rising costs.

• Risk of Overspending

If credit cards tempt you to overspend, closing one can help control debt and improve financial habits.

• Switching to a Better Card

You may want to close a student or secured card after qualifying for a regular or rewards card with better features.

Closing a credit card is not always the best move, as it can affect your credit score and financial profile. Here are a few situations wherein you need to avoid closing a card:

• Do Not Close Your Oldest Card

It helps maintain your credit history length, which supports a better score.

• Avoid Raising Your Utilisation Ratio

Closing a card reduces your total credit limit. This can increase your utilisation and lower your credit score.

• Keep No-Fee Cards Open

A card with no annual fee does not cost anything to keep. It supports your credit score by preserving available credit.

When planning to close a credit card, it is important to do it carefully to avoid hurting your credit score. Follow these steps to ensure a smooth and responsible closure process:

• Redeem Remaining Rewards

Make sure to use any accumulated reward points or cashback benefits if the card offers rewards. Once the account is closed, you may lose access to these benefits.

• Clear Outstanding Balances

Settle all pending dues in full before initiating the closure. Closing a card with an unpaid balance can negatively affect your credit score and lead to additional interest or fees.

• Cancel or Transfer Auto-Payments

Review any automatic payments linked to the credit card, such as subscriptions or utility bills. Move these payments to another card or payment method to avoid missed payments.

• Notify Customer Care and Get Confirmation

Contact the credit card issuer's customer care team to inform them of your decision to close the card. Request a written confirmation of the closure for your records.

• Send a Follow-Up Letter

Draft and send a follow-up letter with your name, account number, and contact details confirming the cancellation request. This helps maintain a formal record of your communication.

If you are not satisfied with a credit card, closing it is not the only solution. Consider these alternatives to maintain your credit health:

• Downgrade to a Card with Lower or No Annual Fees

Instead of cancelling your card, request a downgrade to a basic version with lower or no annual charges. This allows you to keep the account open while reducing maintenance costs.

• Open New Credit to Maintain a Healthy Credit Profile

Opening a new credit account can help preserve your credit utilisation ratio and support a strong credit history. Ensure responsible use and timely repayments to benefit your score.

• Use the Card Occasionally with Small Payments

Keep the card active with small, manageable transactions paid in full each month. This avoids closure due to inactivity and maintains your credit history.

Closing a credit card can significantly affect your credit score, often more than anticipated. Take time to evaluate your financial goals and understand how closing a credit card may impact your long-term credit health. When a card no longer provides value, consider downgrading to a low-fee option. 

You can also keep it active with occasional small transactions. Responsible credit management involves making deliberate, informed decisions today to safeguard your financial prospects in the future. 

Check your CIBIL score for free through a simple and quick digital process on Bajaj Markets to better track and manage your credit profile efficiently.