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Considering cancelling your credit card? Before you do, it’s important to understand how it could impact your credit score. Credit cards let you borrow money from banks or lenders, with the promise that you will pay it back on time. While they can be valuable financial tools, closing a card isn’t always straightforward and may affect your credit in several ways.
Factors like your credit utilisation ratio, length of credit history, pending payments, past defaults, and overall credit mix all play a role.
“Closing a credit card isn’t always a bad move, but it should be done strategically,” Rohan Bhargava, Co-founder of CashKaro and EarnKaro, told Mint.
“It can impact your credit score by increasing your credit utilisation ratio, shortening your credit history, and reducing credit mix,” he added.
He cited an example of someone with a credit score of 780, considered excellent in India, who might see a drop if they close an old credit card with a high limit. With credit card dues rising more slowly this year (15.6% versus 32.5% last year) and both online and offline spending dipping in February, it shows that consumers are becoming more cautious.
When to Consider Cancelling a Card
Deciding to cancel a credit card depends on several key points:
– High annual fees: Some premium cards have high yearly charges that may not be worth the benefits. Make a note of the actual cost and compare it with the perks before deciding.
– Overspending habits: If a card encourages you to spend too much and accumulate debt, cancelling it might help regain control over finances.
– Multiple cards management: Owning too many cards can be confusing, increase the risk of debt, and make it harder to track expenses. Closing unnecessary cards can simplify finances.
– Life changes: Events like divorce or separation may require closing shared cards to avoid complications and debt accumulation.
How to Protect Your Credit Score
You can minimise the impact of closing a credit card by following a few steps:
– Clear all dues: Pay off any outstanding balances before closing the card to avoid penalties or interest.
– Redistribute credit utilisation: Shift balances or limits to other active cards to maintain a healthy utilisation ratio.
– Do not close multiple cards at once: Doing so can hurt your credit score by reducing account age and increasing utilisation.
– Keep older cards active: Long-standing cards help maintain a strong credit profile.
– Check your credit report: Ensure the closure is correctly recorded and there are no errors.
– Redeem rewards: Use any accumulated points or benefits before closing the card to get the most value.
