In this era, the reality of most digital people is that credit cards act like financial life jackets. They offer convenience, mostly in emergencies and for online shopping. The one question that most users forget to think about is: Does closing a credit card damage your CIBIL?
If you are one of those looking to shut down an older credit card, then you should be aware of its effects on your credit health. Not that banks ever discuss this, however, we will discuss so.
Understanding CIBIL Score: Basics
Your CIBIL score, ranging from numbers between 300 – 900, is a major factor in getting loans and credit cards approved: a score above 750 is good, securing you a loan at much lesser interest rates; otherwise, a poor CIBIL score invites rejection of loans and also costs more on borrows.
But, what will happen if you close off a credit card? Does it hurt your credit score, as well? Here it goes again on all.
How Closing a Credit Card Will Leave an Impact on the Credit Score
Credit History Will Be Affected
Credit history reflects a person’s repayment behavior over time. This means that by closing an old credit card account, one is losing track record of repayments that would have otherwise been supporting a good score.
- Longer credit history = Better score
- Closed old account = Shortened history = Drop in score
Credit Utilization Ratio Might Increase
Your credit utilization ratio (the amount of credit utilized vs. the total available limit) plays an important role in your CIBIL score.
- When you close that card, your total limit goes down.
- Provided you do not reduce your spending, your utilization ratio will go up.
- Higher utilization = Negative impact on the score
Expert Tip: Avoid using more than 30% of your credit limit. If your credit limit is ₹1 lakh, make sure your bill is below ₹30,000 to keep your score healthy.
The Average Age of Credit Accounts Will Drop
- Lenders like to lend to borrowers with long and stable credit histories.
- This means that by closing an old credit account, you would be reducing the average age of the credit profile.
- A shorter credit history would thereby pose a temporary disadvantage.
A low Number of Active Accounts Equals Low Credit Diversification
- A mix of credit types (credit cards, loans, etc.) increases a score.
- When a card is closed, it reduces credit diversification.
- Having fewer active accounts may make one appear to be a higher-risk borrower.
Should You Close a Credit Card? The Verdict
Of course, there are good reasons to cancel a credit card (such as high fees, not making use of the card, or wanting a better alternative), but take note of the following reminders:
- Let old credit cards linger – They help lengthen the age of your credit history.
- Monitor credit usage – Do not have the remaining cards maxed out.
- Avoid closing cards frequently – Too many closures during a short period can hurt your score.
think twice before closing. If the card has no annual fee and you have kept it open for years, it is better to keep it alive for your CIBIL score.
How to Improve Your CIBIL Score After Closing a Card
Do not panic if you have closed the card already. Here is what you should do to improve your credit life:
- Pay bills on time – A single late payment can bring the score down.
- Keep utilization low – Do not go over 30% utilization to avoid crushing burdens.
- No multiple applications for new credits – Too many hard inquiries pull your score down.
- Take a good look at your credit report – Dispute any inaccuracies that affect your score.