How does closing a credit card affect your credit score?

Credit cards have become an integral part of modern-day financial management, offering convenience and flexibility in transactions. However, managing credit responsibly is crucial, as it directly influences your credit score. One common question among credit card users is how closing a credit card affects their credit score. Discover how and when to close a credit card without harming your credit score.  Making smart choices about managing your credit cards will help you maintain a healthy credit score and achieve financial stability. 

How does credit score work on a credit card?
 

Before getting into the effects of closing a credit card, it's essential to understand how credit scores operate on credit cards. Your credit score is a numerical representation of your creditworthiness, based on various factors such as payment history, credit utilisation, length of credit history, types of credit accounts, and new credit accounts.

For instance, let's say you recently applied for a credit card. Upon approval, you are assigned a credit limit of ₹1,00,000. You utilise your credit card for your expenses and pay the balance in full each month before the due date. As a result, you maintain a low credit utilisation ratio and demonstrate responsible credit behaviour, positively impacting your credit score. In case your credit utilisation ratio increases, or you are opting for a high value EMI, it may adversely affect your score. However, by making timely repayments, you can bring it to a healthy level again.  

How does closing a credit card affect your credit score?
 

Closing a credit card can impact your credit score in several ways. One significant factor affected is your credit utilisation ratio. This ratio reflects the amount of credit you are using compared to your total available credit. When you close a credit card, your available credit decreases, potentially causing your credit utilisation ratio to rise.

Closing a credit card can also shorten the average age of your credit accounts, which is another factor considered in credit scoring models. A longer credit history is generally seen as more favourable, so closing an older credit card account may have a negative impact on your credit score.

Closing a credit card account may also reduce the diversity of your credit accounts, another aspect of credit scoring. Lenders typically favour borrowers with a mix of credit types, such as credit cards, loans, and mortgages. Closing a credit card could diminish this diversity, potentially impacting your credit score.

When should you close your credit card?
 

Deciding when to close a credit card requires careful consideration of your financial situation and goals. If you have multiple credit cards and are struggling to manage them responsibly, closing one or more cards may be beneficial. However, it's essential to assess the potential impact on your credit score before taking any action.

You may consider closing a credit card if it carries a high fee or interest rate that outweigh its benefits. Additionally, if you're unable to resist the urge of overspending with a particular card, closing it could prevent further financial strain.

How to close your credit card without affecting your credit score?
 

Closing a credit card without negatively impacting your credit score requires strategic planning such as:

• Ensure that closing the card won't significantly impact your credit utilisation ratio. You can achieve this by paying down balances on other cards or requesting a credit limit increase on remaining cards.
• Consider the age of the credit card account you are planning to close. If it's one of your oldest accounts, closing it could have a more substantial impact on your credit score. In such cases, closing newer accounts may be a more prudent choice.
• Before closing a credit card, it's advisable to review your credit report for any errors or discrepancies. Addressing any inaccuracies beforehand can help mitigate potential damage to your credit score.

When closing a credit card, contact the card issuer directly to request closure. Follow up to ensure the account is closed properly and monitor your credit report to confirm that the closure is reflected accurately.

Improving your credit score with a secured credit card
 

Having a secured credit card can help you further build your credit score from scratch and maintain it conveniently. Metra Trust offers the FIRST WOW! Credit Card, an FD-secured credit card that lets you use up to 100% of your deposit limit. You can apply for this credit card online without any income verification. In addition, you get exclusive travel benefits such as zero forex markup fees, merchants offers, and up to 4X never-expiring reward points on everyday purchases that you can redeem anytime for exclusive discounts. This card is ideal for those who wish to build their credit score through responsible credit behaviour.  

Conclusion
 

Closing a credit card can indeed affect your credit score, primarily through changes to your credit utilisation ratio, average age of accounts, and credit account diversity. However, with careful planning and consideration of your financial circumstances, you can mitigate any potential negative impacts on your credit score. Understanding the factors that affect your credit score is essential for making informed decisions regarding credit card management. 

 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Metra Trust or its affiliates to any licensing or registration requirements. Metra Trust shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.