To put it simply, it is better for credit card holders to continue holding their credit cards for decades together, even more so if their respective credit card issuing companies do not charge any annual fees.
That is why one should carefully consider closing a credit card, as it has both pros and cons. What matters in the end is the comfort an individual feels holding credit cards for the long run and the way the overall credit card bill repayment is managed.
Impact on the credit utilisation ratio
- Your overall available credit decreases when you cancel a credit card.
- This reduction generally results in a higher credit utilisation ratio, i.e., the percentage of total credit used in comparison with the available credit.
- Now, when the credit utilisation ratio rises above 30%, such a rise can negatively affect your score. It is a clear reflection of credit hunger and overdependence on debt.
For example, if you have two credit cards with credit limits of ₹1,00,000 each, and you use ₹20,000. Then your credit utilisation is 10% as your total available credit is ₹2,00,000. Such a usage of credit can be termed as perfectly fine.
Still, if you close one of the above cards, your total credit limit will decline to just ₹1,00,000, as your credit limit will also decrease by 50%. Now, if you keep your usage balance at ₹20,000 in such a case, your credit utilisation will instantly double to 20%. Such a rise in credit utilisation can potentially lower your credit score.
Importance of average credit history length
- Length of credit history contributes around 15% to your credit score.
- Closing older credit cards can shorten the average age of your accounts, which may negatively impact your credit score.
- Timely repayment of personal loans, home loans, and credit card bills over time strengthens your credit profile and boosts your credit score.
Importance of having a diverse credit mix
- Credit diversity (mix of credit types) is another scoring component; closing a card can reduce this mix slightly.
- Paying bills on time continues to support your score even after cancellation.
- Any outstanding balance should be cleared before closing to avoid further credit damage.
When you close a credit card, it may lower your credit score by increasing your credit utilisation ratio and shortening your credit history. Still, it is sometimes essential for efficient management of finances.
As a sensible credit card user, you should sit down with a certified financial advisor and understand the pros and cons of holding a credit card before making any decision.
It is vital to keep in mind that holding a credit card comes with several risks, including the possibility of high interest charges if payments are missed, debt accumulation, hidden fees, a negative impact on credit scores, financial fraud, a minimum payment trap, and impulse spending.
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Disclaimer: Mint has a partnership with fintech companies to offer credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article aims to educate readers and raise awareness about the essential needs for credit, including loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.
