Thinking of Closing Your Credit Card? Here’s How It Can Impact Your Credit Score
When it comes to managing personal finance, many people believe that closing unused credit cards can simplify life and reduce financial risks. However, experts warn that this seemingly smart move can sometimes do more harm than good—especially to your credit score. Understanding how credit scores work and how closing a card affects them is crucial before making a decision.
What Determines Your Credit Score
Your credit score is a three-digit number that reflects your financial reliability and borrowing habits. It is influenced by five key factors:
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Payment history – how consistently you pay your bills on time.
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Credit utilization ratio – how much of your total available credit you’re currently using.
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Length of credit history – how long your credit accounts have been active.
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Types of credit – the mix of credit accounts, such as loans and cards.
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Recent credit inquiries – how often you’ve applied for new loans or cards.
Among these, credit utilization ratio plays one of the most significant roles. Financial experts say that this ratio alone can have a noticeable impact on your score.
Understanding the Credit Utilization Ratio
Credit utilization ratio refers to the percentage of your total available credit that you’re currently using. Ideally, this ratio should be below 30%. When you close a credit card, your total available credit decreases, even though your outstanding debt remains the same. This sudden change can push your utilization ratio higher, signaling higher financial risk to lenders.
For example, imagine you have two credit cards with a combined credit limit of ₹2 lakh and you’ve used ₹50,000. Your utilization rate is 25%. If you close one card with a ₹1 lakh limit, your available credit drops to ₹1 lakh—instantly raising your utilization ratio to 50%. Lenders may consider this a red flag, which can reduce your credit score.
The Role of Credit History Length
Another crucial factor affected by closing a credit card is the length of your credit history. Around 15% of your credit score depends on how long you’ve maintained credit accounts. Closing an old card—especially your first one—can shorten this history and negatively affect your score.
However, it’s worth noting that even after closing an account, your credit history remains on your report for about seven years. During this period, it still contributes to your overall credit record, though less effectively than an active account.
The Impact on Credit Mix
Your credit mix—the variety of credit types you manage—is another important element in your credit score. Lenders prefer customers who can handle multiple forms of credit, such as personal loans, auto loans, and credit cards. If you close a credit card, your mix becomes less diverse, which could slightly hurt your score.
When Should You Consider Closing a Credit Card?
While it’s generally advisable to keep old accounts open, there are certain situations where closing a credit card makes sense:
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You’re paying a high annual fee for a card you rarely use.
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The card tempts you into overspending or accumulating debt.
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You already have multiple cards and find it difficult to manage payments.
In such cases, you can close the card but should do it strategically. Before cancellation, try to pay off outstanding balances on other cards to keep your utilization ratio stable. Also, avoid closing your oldest credit card to preserve your credit history length.
The Bottom Line
Closing a credit card might seem like a simple financial decision, but it can have long-lasting effects on your credit score. Since factors like utilization ratio, account age, and credit mix are interconnected, even one closed account can shift your overall credit profile.
Financial experts advise that instead of rushing into closure, consider lowering your spending or reducing card use. Maintaining a few well-managed credit cards can actually boost your financial reputation over time.
In short, think twice before closing that card—it could cost you more in credit score points than you realize.
