The idea of closing a credit card must have crossed your mind if you haven’t used it for a while. However, a seemingly sensible choice, though, may not always be the best one in terms of personal finance. Some credit experts advise keeping unused credit cards open because closing them may lower your credit score. Let’s examine how having an unused credit card affects your credit report.
Five factors make up your credit score: new credit, outstanding balance, credit mix, credit utilization, and length of credit history. The last two variables that are credit utilization and length of credit history are directly impacted by the number of unused credit cards you have.
How a credit card closure affects your credit score?
Unused credit cards, as previously mentioned, directly affect credit history length and credit utilization ratio. It might not be a good idea to close a credit card if you’ve had it for a while, say, two to three years. Closing the card, though, won’t have a big effect on your credit score if you have only had it for a short while.
Secondly, having an unused credit card keeps a significant credit limit locked in, which raises your credit score by boosting your credit utilization ratio. Let’s use an example to better understand this. Ajay has three credit cards with the following credit limits:
| Credit card | Amount |
| 1st | Rs. 1,20,000 |
| 2nd | Rs. 2,70,000 |
| 3rd | Rs.1,00,000 |
Though he rarely uses Credit Card 1, he is considering canceling it because of the high annual fee. With Ajay, there are currently 1,30,000 in total debts.
| Total Credit Limit | Total Debt | Credit Utilization Ratio | |
| Before closing credit card 1 | Rs. 4,50,000 | Rs. 1,30,000 | 28.88% |
| Before closing credit card 2 | Rs. 3,50,000 | Rs. 1,30,000 | 37.14% |
Therefore, closing credit card number one will cause Ajay’s credit utilization ratio to rise above the acceptable limit of 30%, which could cause his credit score to drop.
When should you close any unused credit cards?
The credit card should not be closed, but several circumstances could permit canceling a card, including-
- When the credit card does not grant you any kind of benefits.
- When a credit card’s annual fee is too high.
- When you have an excessive number of credit card accounts.
If the first two issues with your credit card are present together, it has a high annual fee, but it does not offer benefits that are suitable for your needs then discontinuing credit cards might be a smart move. Additionally, you should avoid having too many loan accounts open at once because creditors view such borrowers as credit-hungry.
Read More: How To Increase Limit On Your Credit Card?
Conclusion
Closing a credit card is not advised, but if done carefully, it might not be regretted. It only makes sense if you are required to pay a sizable annual fee without receiving any benefits at all. Don’t just stop using your credit card. Instead, you should work to understand the benefits and advantages of these cards so that you can make the most of them.
Before closing a credit card account, you should carefully consider its advantages and disadvantages, the benefits it provides, and the potential impact on your credit score of closing the account. You should take your time because the choice will differ from card to card.
