Should You Close Old Credit Cards to Improve Your Credit Score?

Vinod, the 32-year-old IT professional in Gurgaon, while enjoying his cold beverage, receives a bank update about his 10-year-old unused credit card. Even though Vinod uses his credit card rarely, he maintains yearly payments of ₹1,000 to the bank.

"Yaar, isko band kar doon kya?" he thinks, recalling a finance influencer’s reel about credit scores. But then, his father’s voice echoes—Beta, purani cheezon ki apni ek value hoti hai.

Closing the card can improve credit utilisation, but the reduced length of credit history will negatively impact his credit score (15%).

Confused, Vinod starts researching—just like you. This post will clear the dilemma and help you make the right choice.

Credit Score 101: Your Financial Report Card!

Getting a good credit score is a fundamental requirement for financial stability in India. People with credit scores above 750 will find easy access to loans and get improved interest rates. Otherwise, banks will treat you like you're trying to get a metro bina ticket!

Factors Affecting Your Credit Score

1. Payment History (35%): “Doston se udhaar liya aur time par vapus nahi diya, toh next time dena se pehle sochege na?” Delaying your bill payments damages your trustworthiness and credit score points.

2.  Credit Utilisation Ratio (30%): Paying for a buffet doesn't mean consuming the whole thing. The most efficient way to use credit is to maintain utilisation at a level below 30% of available credit.

3.   Credit History Length (15%): The longer the history, the better the trust! Financial institutions prefer accounts with a long history because they use them as an indicator of reliable finances.

4.    Credit Mix (10%): A balanced meal is not just rice or roti. You will want a mixture of things in a full meal! A combination of different types of credit, including credit cards, home loans, and personal loans, will function as a tool for enhancing your credit score.

5.   New Credit Enquiries (10%): Har naye sale pe shopping mat karo, warna budget bigad jayega! Multiple frequent applications for new credit cards will result in a damaging effect on your credit score.

How Vinod Maintained a Strong Credit Score

Old Credit Cards and Your Credit History

Your active credit card can help preserve your solid credit history. The longer your credit history, the better your credit score.

Suppose you have had your credit card for 10 years and plan to close the account. Closing your credit accounts will shorten their average age and potentially lead to a diminished credit score.

Does Closing an Old Card Improve Your Score?

People think closing unused old credit cards helps improve their credit score, yet this belief is false. The closure of credit cards produces detrimental effects on the two main components of your credit score:

1. Credit Utilisation Ratio (30% of Score): Let's assume your overall credit limit is ₹5,00,000 and you usually spend ₹1,00,000 (20% utilisation). When you close a long-standing card with a ₹1,50,000 limit, your available credit falls to ₹3,50,000, increasing your utilisation to 28.5%—which can decrease your score.

Credit History Length (15% of Score): If your oldest credit card is 10 years old and you close it, your average account age goes down, making you less creditworthy in the eyes of lenders.

So, rather than cancelling old credit cards, keep them open with the occasional small purchase to keep your credit profile healthy.

Credit Utilisation Ratio: Hidden Impact

The credit utilisation ratio calculation requires the use of this formula:

(Used Credit / Total Credit Limit) × 100

For Example,

1. Before closing a card:

• Total Credit Limit = ₹5,00,000
• Used Credit = ₹1,00,000
• Utilization Ratio = (1,00,000 / 5,00,000) × 100 = 20%

2.  After closing a card with a ₹1,50,000 Limit:

• New Total Credit Limit = ₹3,50,000
• Used Credit = ₹1,00,000
• Utilization Ratio = (1,00,000 / 3,50,000) × 100 = 28.5%

A utilisation ratio above 30% can damage your credit score, and closing an old credit card without lowering spending may harm your financial standing.

High Annual Fees: Paisa Vasool Ya Waste?

A utilisation ratio above 30% can damage your credit score, and closing an old credit card without lowering spending may harm your financial standing.

When Should You Close It?

• The card's rewards (such as cashback or rewards) are not worth the annual fee.
• You have several other cards with enough credit limit.
• Closing it will not make a significant impact on your credit utilisation ratio.

When Should You Keep It?

• The card has an old credit history that keeps your credit age intact.
• Closing it will push your credit utilisation ratio above 30%.
• You can negotiate with the bank to waive the fee.

Impact of Closing a High Annual Fee Credit Card

Debt Consolidation: Ek Teer Do Nishane!

It combines your several outstanding debts into a new loan with a single monthly payment and a reduced interest rate to help you lower your financial stress.

Managing several credit cards becomes easier and less expensive through debt consolidation. Taking a personal loan at low interest rates will enable you to unite your various high-interest credit card debts into a single payment.

Advantages of Debt Consolidation

• Lower Rate of Interest: Personal loan interest rates (10% to 15%) are significantly less than credit card interest rates (36% to 42%).
• Single EMI: No multiple payments are to be tracked; it is simply a single fixed EMI monthly.
• Enhances Credit Score: Eliminating credit card debt lowers credit utilisation, increasing your score.

Credit Mix: Variety Zaroori Hai!

A good credit profile contains a combination of various types of credit. Credit bureaus prefer borrowers with revolving credit (credit cards) and installment loans (home, auto, personal, etc.). 

If you use only credit cards and have no loans, your credit mix could be weak.

Example: Impact of Credit Mix on Credit Score

Why is a Good Credit Mix Important?

• Credit mix accounts for 10% of your credit score.
• A mix of credit cards and loans indicates financial responsibility.
• Lenders trust borrowers who handle both short-term and long-term credit well.

When Should You Close A Credit Card?

Closing a credit card is not always the ideal option, but it is a good choice in certain situations. These are the following instances when closing a card may be a good choice:

1. High Annual Charges Without Sufficient Benefits

If your credit card has a minimum annual fee of ₹5,000 but does not provide cashback, rewards, or discounts, it may not be a good idea to keep it.

Alternative: Attempt to negotiate a fee waiver or change to a no-fee card before closing.

2.  To Manage Overspending

If you're overspending and having trouble paying bills, closing a card can prevent debt traps.

Example: If you have a ₹2,00,000 credit limit but consistently max it out, cutting off access to additional credit can help keep expenses in check.

3.  Risk of Fraud or Misuse

If your card is lost, stolen, or compromised, the best course of action is to close it to avoid fraudulent charges.

Alternative: Rather than closing all cards, activate transaction alerts and impose spending limits for greater security.

How To Close A Credit Card Without Hurting Your Score?

Closing a credit card properly can minimise the effect on your credit score. The following steps provide clarity through numerical explanations.

Alternatives to Closing Your Credit Card

Instead of closing a credit card, which hurts your credit score, try these wiser options:

1. Maintain Low Usage

Keep the card, but use it sparingly to keep it active.

Example: If your credit limit is ₹2,00,000 and you spend only ₹2,000 every month, your credit utilisation remains low, which benefits your score.

2.  Upgrade to a No-Fee Card

If the annual charge is an issue, request a downgrade to a lifetime free card rather than closing it.

Example: If your card has an annual charge of ₹5,000, switching to a zero-fee version will save you money without affecting your credit history.

3. Convert to EMI Option

If you have a large outstanding balance, convert it into EMIs rather than closing the card.

Example: If you convert ₹60,000 as debt into a 12-month EMI at a 12% interest rate, your EMI would be approximately ₹5,350, which is more manageable.

4.   Lower Credit Limit

To manage expenses, request the bank to lower your credit limit rather than closing the card.

Example: If you have a credit limit of ₹3,00,000 and you require ₹50,000, lowering it can control costs without affecting your credit history.

Conclusion

Closing an old credit card may appear to be a convenient means of cleaning up your finances, but it can have some unforeseen effects. Although it can assist in managing spending or preventing excessive annual fees, it can hurt your credit history length and the credit utilisation ratio—both are important determinants of your credit score. 

Rather than closing, try alternatives such as lowering your credit limit, converting to a no-fee card, or making occasional transactions to maintain it as active. Good credit management guarantees good financial health in the long run!

FAQs

• Should I close an unused credit card?

Unless it has an annual fee, it is best to leave it open, as it keeps your credit history alive.

• Does paying off my credit card balance help my credit score?

Yes! Paying your outstanding balance in full and making on-time payments can help increase your credit score.

• How do I avoid credit card annual fees?

You can ask the bank to downgrade your card to a no-fee one.

• How much should my credit utilisation ratio be?

Ideally, below 30% for a positive effect on your credit score.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?