Short answer - Cancelling a credit card can lower your credit score by reducing your credit limit and shortening your credit history. It’s best to keep old cards open, especially if they have no fees.
Impact of Credit Card Cancellations on Your Credit Score
Credit cards are powerful financial tools when used wisely. But what happens when you no longer need one and decide to close it? Whether it's an old card gathering dust or one with a high annual fee, many people consider cancelling their credit cards to simplify their finances. However, a question that often arises is: Does cancelling a credit card affect your credit score?
If you’re unsure about the impact of credit card closures on your credit profile, this blog will help you understand the connection and make informed decisions.
Does Cancelling a Credit Card Affect Your Credit Score?
The short answer is yes, it can. Closing a credit card may affect your credit score. However, the extent of the impact depends on your overall credit history, the length of time you’ve held the card, and how you manage your other credit accounts.
So, if you've been wondering, "Does closing a credit card affect score?" the answer is: it certainly can, and here’s how.
How Does Cancelling a Card Affect Credit?
To understand the impact of closing a credit card, it is helpful to know what factors influence your credit score. The major credit bureaus typically consider the following:
- Payment history
- Credit utilisation ratio
- Length of credit history
- New credit
- Credit mix
When you cancel a credit card, a few of these areas may get affected, particularly your credit utilisation and credit history.
1. Increased Credit Utilisation
This is one of the biggest reasons why closing a credit card can affect your credit score. The credit utilisation ratio is the percentage of your total available credit that you're currently using. Ideally, it should be below 30%.
Here’s an example:
Let’s say you have two cards with a combined credit limit of ₹2,00,000, and you use ₹40,000 per month. That puts your utilisation at 20%. If you cancel one card with a ₹1,00,000 limit, your total limit drops to ₹1,00,000, raising your utilisation to 40%. This can lower your credit score.
2. Shortened Credit History
Another important factor is the length of your credit history. Older accounts help build a stronger credit profile by showing lenders a longer track record of responsible usage.
If you cancel your oldest credit card, you may shorten your average account age, which can negatively impact your credit score. However, if it's a new credit card, your score may not have a significant impact.
3. Impact on Credit Mix
Having a mix of different types of credit, such as credit cards, personal loans, and auto loans, can help your credit score. If you only have one or two credit accounts and decide to close one, it could limit your credit diversity and have a slight impact on your score.
While this isn’t usually a major concern for those with a healthy credit history, it’s still worth keeping in mind if your credit profile is still developing.
When Should You Consider Cancelling a Credit Card?
There are certain situations where cancelling a card might make sense:
- If the card has a high annual fee and doesn’t offer enough value.
- If it tempts you to overspend or fall into debt.
- If it’s a joint account and you’re separating from the co-holder.
- If the issuer has significantly changed the terms or rewards.
Before making a final decision, it’s wise to do an online credit score check to see where you stand. If your score is on the lower side, you might want to hold off on cancelling until it improves.
Tips to Minimise the Impact of Credit Card Cancellations
If you’ve decided that cancelling a credit card is the right move, here are some steps to help minimise its effect on your credit score:
- Pay off your balance in full before requesting cancellation.
- Keep your oldest credit card active if possible.
- Reduce outstanding balances on other cards to maintain a healthy utilisation ratio.
- Consider downgrading to a no-fee version instead of cancelling.
- Check your credit score after cancellation to monitor any changes.
Remember, a temporary dip in your credit score isn't the end of the world. But being prepared can help you avoid surprises and plan better.
Does Closing a Credit Card Affect Score Immediately?
Not necessarily. The impact may not show up right away, especially if the card had no outstanding balance and you have other healthy credit accounts. However, the effect might become visible over the next one or two billing cycles.
That’s why it’s good practice to check your credit score online periodically after cancelling any credit product. This helps you track changes and take corrective actions early if needed.
Final Thoughts
Cancelling a card doesn’t have to be a big deal. But closing credit accounts without understanding the impact on credit utilisation and history can do more harm than good.
Before taking that final step, consider alternatives like downgrading the card or simply using it for small, manageable expenses to keep it active. And don’t forget to check your credit score online regularly to stay informed.
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