It’s usually better to keep them open, especially if they have no annual fee. Closing a card can lower your credit score by reducing your credit history and available credit.
Is It Better to Close Unused Credit Cards or Keep Them Open?
One of the common dilemmas with people who use credit cards is whether they should close unused credit cards or keep them open. At first glance, closing a card you no longer use might seem like the smart move, but this can also impact your credit score.
But does closing a credit card affect credit score significantly? This guide will walk you through everything you need to know before making that decision.
Does Closing a Credit Card Affect Credit Score?
To understand the effect of closing a card, you must first understand how credit scores work.
Your credit score is a three-digit number that reflects your credit behaviour—how responsibly you use and repay borrowed money. Credit bureaus calculate your score based on various factors such as payment history, credit utilisation, length of credit history, credit mix, and new credit activity.
Now, coming back to the main question: does closing a credit card affect credit score?
Yes, it can. And in most cases, not in the way you might exact.
The Impact of Closing a Credit Card on Credit Score
Let’s look at how closing a credit card, especially an unused one, can influence different aspects of your credit score.
1. Credit Utilisation Ratio
This is one of the most crucial components affecting your score. It refers to the percentage of your total credit limit that you’re currently using. For example, if your total credit limit is ₹1,00,000 and you’ve used ₹30,000, your credit utilisation is 30%.
If you cancel a credit card, your total available credit reduces. So, even if your spending remains the same, your credit utilisation increases, leading to a potential dip in your credit score.
2. Length of Credit History
Another factor that contributes to your score is the average age of your credit accounts. If the card you’re thinking of closing is your oldest one, doing so could shorten your credit history and affect your credit score.
3. Credit Mix
A healthy credit profile includes a mix of different types of credit, such as credit cards, personal loans, and EMIs. Removing a credit card from this mix might impact your score, especially if it’s your only revolving credit line.
When Might It Make Sense to Cancel a Credit Card?
While keeping cards open generally helps your credit score, there are some valid situations where it might be better to close one.
1. High Fees or Unnecessary Charges
If a credit card comes with high annual fees or hidden costs and you no longer use it, closing it may make financial sense.
2. Risk of Overspending
If having too many cards tempts you to spend more than you can afford to repay, closing a credit card could help you maintain better control of your budget.
3. Security Concerns
Sometimes, people want to close an unused credit card because they’re worried it could be compromised or misused. In such cases, it may be safer to cancel it rather than keep it open and unmonitored.
How to Cancel a Credit Card Without Hurting Your Score
If you’ve decided that closing a credit card is the right step for you, here are some ways to reduce the negative impact on your credit score.
1. Pay Off All Outstanding Balances
Before initiating the closure, make sure the card has zero balance as you will not be able to close any card with an outstanding balance.
2. Redeem Unused Rewards
If the card has reward points, cashback, or other benefits, redeem them before closing to avoid losing their value.
3. Keep Your Oldest Card Open
Try to keep your longest-held card active, even if you use it occasionally. This helps maintain your credit history and supports a good credit score.
4. Monitor Your Credit Score
After closing a card, make sure to check credit score online periodically to see how your score is impacted. This will help you take steps if you see an unexpected dip.
Should You Keep Unused Credit Cards Open?
Now let’s look at the benefits of keeping unused cards open.
1. Boosts Credit Utilisation
As long as the card doesn’t have high maintenance fees, keeping it open increases your total credit limit and helps maintain a low utilisation ratio.
2. Builds Long-Term Credit History
Even if you don’t use the card regularly, its presence on your report continues to add weight to your credit history length, which is an important factor in improving your credit score.
3. Emergency Backup
An unused card can serve as a financial backup in emergencies. Instead of applying for a new card in a hurry, you already have access to funds.
How to Improve Credit Score with Responsible Credit Card Use
If you're aiming to boost your score, closing credit cards may not always be the best idea. Instead, you can follow these tips:
- Use your cards occasionally and pay off the balance in full every month.
- Don’t max out your cards—keep utilisation below 30%.
- Make all payments on time.
- Avoid applying for multiple cards or loans at once.
- Perform a credit score check every few months to track your progress and identify any errors in your credit report.
Conclusion
So, is it better to close unused credit cards or keep them open? The answer depends on your personal financial habits and goals. However, if your goal is to improve your credit score and maintain a strong credit profile, keeping unused cards open—especially those with a long credit history and no annual fee—is generally the better choice.
Whether you choose to keep or close your cards, stay proactive, check credit score online, review your credit report regularly, and make informed decisions to maintain a financially healthy life.
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