Credit card closure explained: When it helps, when it harms your score

A credit card is a tool that allows borrowers to utilise funds to meet day-to-day expenses such as groceries, clothing, and other household items. Now, what is important to keep in mind in this case is that a credit card is not real money. It is a form of credit only.

That is why several credit card users look to close their credit cards to simplify their finances and improve their overall debt-to-income ratio. Such a move can, hence, look like a smart one; still, it can have several unwanted consequences that can even damage your credit score. Many borrowers overlook that shutting down or closing their credit card, especially an older one, can affect their overall credit health.

Anand Agrawal, Co-Founder, FixMyScore and Credgenics, says, “Closing a credit card may seem like a smart move to simplify finances, but it can harm your credit score in certain cases. The oldest credit accounts build credit history, and shutting one down shortens that timeline. It may also hike the credit utilisation ratio. If the cardholder carries balances on other credit cards, this means pushing the credit utilisation ratio over the safe 30% mark and signalling risk to lenders.”

“Sometimes, this can also change the credit mix diversity in terms of secured and unsecured credit. Before acting, one should review the full credit report and analyse it. Also, pay down debts, spread credit utilisation and weigh keeping low-activity credit cards open with zero balances. These small steps are often ignored but can safeguard bigger opportunities like eventually lowering the interest rates on future loans,” he added.

Let us examine these concepts in greater depth and understand how one can manage credit in a seamless manner to secure future personal loans, credit cards, or other forms of credit.

How closing a card affects your score

• Credit history shortens: Your old credit cards contribute to a more extended credit history. They help strengthen your credit profile and overall credit score. Closing them can reduce this advantage by weakening your credit history.
• Credit utilisation rises: This is a ratio of used credit limit to total available credit limit. When this ratio spikes, it is a clear sign of credit hunger. It signals a higher risk to lenders.
• Credit mix changes: Lending institutions prefer a healthy mix of both secured and unsecured credit. Closing a credit card may alter this balance. A healthy mix means a fair collection of personal loans, credit cards and home loans that are repaid responsibly.

When it might make sense to close a credit card

Closing a credit card can make sense if:

1. You are holding a credit card with very high annual fees but limited utility.
2. Credit cards that tempt you to make irresponsible purchases and overspend.
3. Fundamentally, you hold a credit card that offers no meaningful additional benefits, rewards or cashbacks.

Steps to protect your credit

To protect your credit, i.e., future borrowing potential, you should:

1. Carefully review your credit report before closing a credit card.
2. Clear any outstanding dues and balances to maintain a clean credit profile.
3. Focus on maintaining a healthy credit utilisation.
4. Make sure that you have meaningful credit cards linked that you actually use.

In conclusion, while credit cards can offer comfort and convenience, mismanagement of these credit tools can land you in serious debt. High interest rates, penalties and in extreme cases, legal ramifications can also follow. That is why you should always consult a certified financial advisor before making decisions about credit cards, so that your long-term financial interests can be protected.

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Disclaimer: MintMoney has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. MintMoney does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.