Analysing the types of loans you have, calculating the credit utilisation ratio and the holding period of credit accounts are the starting points before initiating the credit card closure request, is important.
If you have too many credit cards, you may want to cancel some of the cards. You may consider cancelling a credit card if it's costing you high fees if you're not using it, or if it leads to overspending. However, cancelling a credit card can have some adverse effects.
“Credit experts advise against closing credit cards, even when you’re not using them. The primary reason is the increase of your credit utilisation ratio where you have debts on other cards or accounts. This would in turn decrease your CIBIL score,” says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind. a financial planning firm.
However, there are certain situations where closing your credit card may be necessary. In that case, you need to keep a few things in mind.
To minimise the impact on your credit score, first, pay off any outstanding balance. Otherwise, you will not be able to close your credit card.
“Analysing the types of loans you have, calculating the credit utilisation ratio and the holding period of credit accounts are the starting points before initiating the credit card closure request, is important,” says Sen.
If you pay the balance on time, credit cards are an excellent way to build a credit score. So if you close more than one credit card at the same time, or close a credit card which you have been using for a long time, it may affect your credit score.
“It's also wise to not close multiple cards at once or the one with the highest credit limit or even your oldest credit card as it has a long track record of your repayment habits,” says Adhil Shetty, CEO, BankBazaar.
Shetty suggests that before cancelling, you should consider redistributing the limit to another card if possible. Lastly, ensure you get a confirmation of the closure in writing from the credit card company.
To sum up, closing a credit card requires caution due to potential impacts on your credit score. The closure may reduce your overall available credit, leading to a higher credit utilisation ratio, and negatively affecting your score.
Additionally, closing a long-standing account can shorten your credit history, another factor influencing your creditworthiness. It's vital to assess the implications, before closing a credit card to make informed decisions and minimise adverse effects on your credit score.