Credit Card Closure Risks: How Cancelling a Card Can Increase Credit Utilization and Hurt Your CIBIL Score

In today’s digital-first financial ecosystem, credit cards are no longer just a convenient payment tool — they play a crucial role in shaping your overall credit profile. Many people feel relieved after closing unused or rarely used credit cards, assuming it simplifies money management. However, financial experts warn that closing a credit card can unintentionally damage your CIBIL score and affect future loan eligibility.

Understanding how credit cards influence your credit health is essential before making any decision that could have long-term consequences.

Why Closing a Credit Card Can Backfire

When you close a credit card, the most immediate impact is a reduction in your total available credit limit. This directly affects one of the most important factors in credit scoring: the credit utilization ratio.

Credit utilization refers to the percentage of your available credit that you are using at any given time. Credit bureaus and lenders generally prefer this ratio to stay below 30%, as it reflects controlled and responsible borrowing behavior.

For example, if you have a total credit limit of ₹2 lakh across multiple cards and your outstanding balance is ₹50,000, your utilization ratio is 25%. However, if you close one card and your total available limit drops to ₹1 lakh, the same ₹50,000 outstanding balance now represents a 50% utilization ratio. This sudden increase can be seen as a higher credit risk, even though your spending habits haven’t changed.

How Credit Card Closure Impacts Your CIBIL Score

There are several reasons why shutting down a credit card can negatively affect your CIBIL score:

1. Higher Credit Utilization Ratio

A higher utilization ratio signals financial stress to lenders. Even if payments are made on time, consistently using a large portion of your available credit can pull your score down.

2. Shorter Credit History

Older credit cards contribute to a longer credit history, which is a key component of your credit score. Closing an old card shortens the average age of your credit accounts, making your credit profile appear less established.

3. Reduced Credit Mix

A healthy credit profile usually includes a mix of credit types — such as credit cards, personal loans, home loans, or auto loans. Closing a credit card reduces this diversity, which can slightly weaken your credit score.

When Closing a Credit Card Might Make Sense

While keeping cards open is often beneficial, there are situations where closing a card may be justified. For instance, if a card carries high annual fees, offers no meaningful benefits, or tempts you into overspending, closing it might be a practical decision. In such cases, it’s advisable to first reduce outstanding balances on other cards to maintain a healthy utilization ratio.

Smarter Alternatives to Closing a Credit Card

Instead of immediately cancelling an unused card, experts suggest considering these alternatives:

• Keep no-fee cards active: If the card has no annual charges, keeping it open helps preserve your credit limit and credit history.

• Use the card occasionally: Make a small purchase once every few months and pay it off on time to keep the account active.

• Pay bills on time: Timely payments remain the single most important factor in maintaining a strong CIBIL score.

• Limit usage to under 30%: Staying within this range signals disciplined credit behavior.

These small steps can protect your credit score while giving you the flexibility to manage your finances effectively.

What This Means for Everyday Consumers

Closing a credit card may feel like reducing financial responsibility, but in reality, it can silently harm your creditworthiness. A lower CIBIL score can make future loans more expensive or harder to obtain, whether it’s a home loan, car loan, or personal credit.

Lenders closely analyze credit utilization, payment history, and account longevity before approving loans. A sudden dip in your credit score due to card closure could negatively influence these decisions.

Final Takeaway

Cancelling a credit card is not always the right financial move. While it may offer short-term peace of mind, it can weaken your credit profile in the long run. Maintaining older cards, using them responsibly, and keeping your credit utilization low are often more effective strategies for preserving a healthy CIBIL score.

Before closing any credit card, take a moment to assess how it fits into your overall financial plan. A well-managed credit card can be an asset — but closing it without careful thought could cost you more than you expect in the future.