CIBIL: If you close your credit card, your CIBIL score will be negatively affected! Understand the complete process here..

In today's world, credit cards are no longer just a means of making purchases; they have become an integral part of your entire financial identity. Banks, lending companies, and financial institutions decide whether or not to grant you a loan based on your credit history. Many people, therefore, close their credit cards, thinking there's no point in keeping them if they're not being used. However, this decision can actually harm your CIBIL score.

When you close a credit card, your total available credit limit decreases. Let's say you have two cards with a combined limit of ₹2 lakh. If you spend ₹40,000 every month, your credit utilization ratio will be 20%. But as soon as you close one card and the limit drops to ₹1 lakh, the same spending suddenly appears as 40% utilization. Banks consider this a higher risk.

Why does this directly impact your CIBIL score?
Several factors are considered when determining a credit score. The most important is how much of your credit limit you are using. A high utilization ratio indicates that you are overly reliant on credit. Additionally, closing an old card shortens your credit history, weakening the stability of your score. Having a mix of different types of credit is also considered positive for your score, and closing a card disrupts this balance.

Should you never close a credit card?
If a card has high annual fees or its benefits are not useful to you, then closing it might be a wise decision. However, if the card is free, it's best to keep it active and use it occasionally for small purchases. Always keep your credit card utilization below 30% of your limit. Pay every bill on time and in full. Keep your oldest card active and avoid closing cards unnecessarily. These small habits can help maintain a strong credit score in the long run.

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