Impact of Credit Card Cancellations on Your Credit Score

1. Reduces the available limit on the credit card, thereby increasing the credit utilization ratio. 

1. A higher utilization ratio signals risk to lenders, as it indicates heavy reliance on credit. 

1. For a better credit score, experts recommend keeping your credit utilization below 30%. 

1. Effect on Credit Score: 

1. Credit card cancellation shortens the average age of accounts, impacting the credit score. 

1. To improve the score, older accounts contribute positively to the credit history of the credit cardholder. 

1. Missed payments on a closed card remain on the credit report for five to seven years. 

1. Recovering the Credit Score: 

1. Timely bill payments can restore the credit score and prevent it from decreasing on cancellation of credit score. 

1. The credit score will gradually improve, if no new debt is incurred. 

1. If you plan to apply for loans or credit in the near future, then avoid cancelling the credit card. 

When Should You Cancel Your Credit Card? 

The circumstances when cardholders should consider closing the credit card are mentioned below: 

1. Minimal benefits on payment of nigh annual fees. 

1. High-interest rates, making it expensive to maintain a balance. 

1. Difficulty managing debts, thereby leading to overspending. 

1. Planning to switch from a student credit card to a regular or rewards card. 

What are The Reasons to Keep Your Credit Card? 

You can keep your credit card considering the situations mentioned below: 

1. It helps maintain an old account, improving your credit history. 

1. It is difficult to get a card in future after closing it. 

1. Closing a card also impacts the credit history. 

1. If you rarely use the card, consider whether cancelling it is necessary. 

Can I Close a Credit Card Without Damaging My CIBIL Score? 

Yes, you can close your credit card without impacting your CIBIL score and the steps to do so are mentioned below: 

1. Clear Outstanding Dues: Ensure all pending payments are settled before closing the card. 

1. Redeem Reward Points: If you have a rewards credit card, use any remaining points. 

1. Manage Auto-Payments: Cancel the auto-payment system or transfer the amount to another active card to avoid missed payments. 

1. Notify the Issuer: Inform your credit card provider about the closure and provide written confirmation about the request. 

1. Follow Up: Provide details like name, phone number, address, and card number to confirm closure. 

1. Destroy the Card: Cut it into small pieces and dispose of them separately to prevent fraud. 

Are There Any Alternatives to Closing a Credit Card? 

Yes, there are alternatives to closing your credit card and those are mentioned below: 

1. Request a Fee Waiver: If the annual fee is too high, contact your issuer to negotiate a waiver or reduction, as some banks offer this to retain customers. 

1. Control Spending Habits: To develop better financial habits, avoid overspending by securely storing the card or pausing its use for a few months. 

1. Keep the Card Active: To keep the card active set up a small recurring subscription (e.g., a magazine or book service) while ensuring timely payments. 

How does credit card usage affect your credit score? 

The use of credit card impacts your credit score and the details about it is mentioned below: 

1. Credit Score Components: 

1. Payment History (35%): Records of timely payments. 

1. Credit Utilization (30%): Ratio of balance to credit limit. 

1. Credit History Length (15%): Average age of accounts. 

1. New Credit (10%): Recently opened accounts and inquiries. 

1. Credit Mix (10%): Variety of credit types like loans and credit cards. 

1. Impact on Credit Utilization Ratio: 

1. Closing a card lowers your total available credit. 

1. This increases the credit utilization ratio, which can lower your credit score. 

1. Experts recommend keeping utilization below 30% for a healthy score. 

1. Effect on Credit History Length: 

1. Closing an old credit card reduces the average account age. 

1. Though closed accounts stay on your report for 10 years, their impact weakens over time. 

1. Impact of Recent Activity: 

1. Closing a card while having multiple new credit accounts can lower your average account age and harm your score. 

1. Avoid closing older cards if you have recently applied for new credit cards. 

1. Consider the Card Benefits Before Closing: 

1. If a card has a high annual fee but no useful perks, closing it might make sense. 

1. If it has no fee, keeping the card open helps maintain a strong credit utilization ratio and history length. 

1. Maintain a Diverse Credit Mix: 

1. Credit scores improve by having different types of credit. 

1. Credit mix may get impacted negatively if the closed card is one of the few cards the cardholders have. 

FAQs on Impact of Credit Card Cancellations on Credit Score 

• What is the impact on CIBIL scores if a credit card is cancelled? 

CIBIL score gets impacted negatively if a credit card account is closed and it reduces the credit amount while raising the utilisation ratio which is the amount you are indebted to as a percentage of your total available credit. 

• In how many days can a credit card be closed? 

It takes seven working days for the closure of credit cards between the cardholder and issuer to get completed. 

• Is there a penalty for closing a credit card? 

Yes, a penalty of Rs.500 per day will have to be paid to the customer by the issuer till the closure of the account provided there are no outstanding in the account according to RBI. This will happen if the card issuer fails to complete the process of closure of a credit card within seven working days.  

• What happens to your credit score if you stop using credit cards? 

Credit score does not get impacted if you have not used your card for a long time but if lender decides to close the account due to inactivity, then it might affect your credit score negatively. 

• How long can you go without using a credit card before it closes? 

There are no strict rules regarding when a lender may close an account due to inactivity. While a month of non-usage is not an issue, prolonged inactivity may require contacting the issuer to avoid unexpected closure.