18-Aug-2018 written by : FSI-Team
Many a times people get carried away by the attractive deals offered by the credit card agents and apply for the card. But later they realize that it is difficult to manage so many cards. Keeping track of monthly statements, due dates and making the payments on time becomes an overwhelming task.
So can we close the credit card that we no longer need without crushing our CIBIL score? For this we need to first understand the factors that affect CIBIL score calculation, and how things change when we close a credit card. Our credit card payment behaviour gets recorded on our credit report and has a major impact on our credit scores. Credit utilization ratio is the biggest determinant that makes up 30% of the CIBIL score. This ratio is the ratio of the outstanding balance on the credit cards to the total available credit limit. A high credit limit helps in keeping this ratio low and improves CIBIL score.
Cancelling a credit card reduces your available credit limit and increases the credit utilization ratio. This has a negative impact on your credit score. For example, suppose you have 2 credit cards with a credit limit of Rs 1 lakh each. Your first card has an outstanding balance of Rs 50,000 and the second Rs 0. Your credit utilization ratio is 50,000 / 2,00,000 * 100 = 25%. But if you close your second card, the total available limit drops to Rs 1,00,000 increasing the utilization to 50%. This increases your credit risk and severely hampers your credit score. The length of the credit history also affects the CIBIL score calculation. Closing old credit cards reduces the average age of your accounts and affects the score negatively.
So does that mean you should never close a credit card? Is it better to just put away a card and not use it at all? Not really. If you are paying a high annual fee on a card and not using it at all, it is wise to close it. Also, if you think that your spending habits are going out of control because of the temptation to use up the credit limit, it is better to close the card. Non-payment of expenses that you charge on your card will hurt your score even more than closing the card.
Also, there are certain things that you can do and avoid, so that the effect on the score is minimal. Let’s see what is the smart way of cancelling a card without damaging your score.
Hence, one can cancel old credit cards if it is deemed necessary. But doing it in a smarter way will help prevent any negative impact on your CIBIL score.