Will Credit Score Get Impacted On Closing Credit Cards?

Closing a credit card account is a significant financial decision that can have various implications for your credit score. While it might seem like a straightforward step, especially if you no longer use the card or want to reduce the temptation of spending, closing your credit card could still have a big impact on your credit score. 

Most people consider closing a credit card because either they have too many cards or they are not happy with the features of the credit card. If you are looking for a new credit card after closing your previous one, then we suggest applying for an Airtel Axis Bank Credit Card from the Airtel Thanks app. 

The eligibility conditions for this credit card are very less, you will only need a handful of documents, and you get features such as airport lounge benefits, fuel surcharge discounts, cashback on recharges or bill payments and more. Apply for yours today!

Now let us take a closer look at how closing your older credit card can impact your credit score.

How does credit card usage affect your credit score?

To comprehend how closing a credit card impacts your credit score, it’s essential to understand the components of a credit score. A credit score, often calculated using the FICO model, is composed of the following data:

• Payment History (35%): Your record of on-time payments.
• Credit Utilisation (30%): The ratio of your current credit card balances to your credit limits.
• Length of Credit History (15%): The age of your oldest and newest accounts and the average age of all your accounts.
• New Credit (10%): The number of recently opened accounts and credit inquiries.
• Credit Mix (10%): The variety of credit types you have (e.g., credit cards, personal loans, etc.)

Read more: CIBIL score for credit card – minimum and maximum

Closing your credit card impacts your credit utilisation ratio

One of the most immediate impacts of closing a credit card is on your credit utilisation ratio. This ratio is calculated by dividing your total credit card balances by your total credit limits. For instance, if you have a total credit limit of ₹10,000 and your balance is ₹2,000, your credit utilisation ratio is 20%.

When you close a credit card, you reduce your total available credit. If your spending habits remain the same, this can lead to a higher credit utilisation ratio, which can negatively impact your credit score. Credit experts recommend keeping your credit utilisation ratio below 30% to maintain a healthy credit score.

Effect on the length of credit history

The length of your credit history is another crucial factor. Closing an older credit card can shorten your average account age, which can negatively affect your credit score. Even though closed accounts in good standing remain on your credit report for up to 10 years, their influence diminishes over time compared to open accounts.

Impact of recent activity on closing a credit card

If you’ve recently opened several new credit accounts, closing an old credit card can further impact your score. New accounts lower the average age of your credit history and can signify riskier financial behaviour to lenders. Coupled with closing an older account, this can lead to a noticeable dip in your credit score. Make sure you avoid closing your older credit card if you have just applied for multiple new credit cards.

Look at the benefits of the credit card before you close it

Before deciding to close a credit card, weigh the benefits against any fees. If the card has a high annual fee but offers rewards or benefits you no longer use, it might make sense to close it. Conversely, if the card has no annual fee, keeping it open could help maintain your credit utilisation ratio and the length of your credit history without costing you extra money.

Read more: Quick tips to cancel or close your credit card

Keep your credit mix diverse for a positive credit score

Your credit mix, or the variety of credit accounts you have, also plays a role in your credit score. If the credit card you’re closing is your only card or one of the few, closing it could negatively impact this aspect of your credit score. Maintaining a diverse mix of credit types is generally beneficial for your credit score.

Closing a credit card can have several impacts on your credit score, most of them are usually negative. However, if this one specific credit card has a very high annual fee but you are not using it at all, then it is always a good idea to close it. Make sure you do a thorough comparison of the pros and cons before you eventually close a credit card.