Does Cancelling a Credit Card Hurt Your Credit Score?

Managing credit cards is an essential part of maintaining financial health. Whether it's to reduce unnecessary accounts, avoid annual fees, or simply tidy up your wallet, many people at some point consider cancelling a credit card. But is that a good idea? Could it impact your credit score?

The short answer: Yes, cancelling a credit card can hurt your credit score - but the extent depends on several factors. In this article, we'll break down what happens when you cancel a credit card, how it affects your credit profile, and the right way to do it to minimise any negative impact.

Why Would You Want to Cancel a Credit Card?

Before understanding the effects on your credit score, let's look at the common reasons people choose to close credit cards:

• High annual or renewal fees

• Lack of use or duplicate card benefits

• Upgrading to a better rewards program

• Reducing the temptation to overspend

• Concern over security or fraud

While these are valid reasons, it's crucial to weigh them against the potential impact on your credit score.

How Cancelling a Credit Card Affects Your Credit Score

1. Your Credit Utilisation Ratio Goes Up

This is perhaps the most immediate and significant way cancelling a credit card can affect your credit score. Your credit utilisation ratio is the percentage of your total credit limit that you're using. Ideally, this should stay below 30%.

Example: If you have two credit cards with a combined credit limit of RS 2,00,000 and you usually carry a balance of Rs 40,000, your utilisation is 20%. But if you cancel one card with a Rs 1,00,000 limit, your utilisation jumps to 40%, which could lower your credit score.

2. Your Credit History May Get Shorter

Credit scoring models often consider the average age of your credit accounts. Older accounts help boost your credit profile. Cancelling your oldest card may lower your average account age and hurt your score - especially if your credit history is relatively young.

However, most credit bureaus in India (like CIBIL or Experian) continue to report closed accounts for a few years, so the impact is not immediate, but worth keeping in mind.

3. Your Credit Mix Could Be Affected

Credit scoring systems look at your ability to manage different types of credit - revolving (credit cards) and instalment (loans). Cancelling a credit card could reduce this mix, especially if you don't have other revolving credit. A limited credit mix can lower your creditworthiness in the eyes of lenders.

Situations When Cancelling Might Not Hurt Much

There are cases when cancelling a card has little to no impact on your score:

• If the card is fairly new or has a low credit limit

• If you already have multiple active credit lines

• If your credit utilisation remains low even after cancellation

• If the card has no history of late payments or loans attached

That said, if you plan to apply for a home loan, car loan, or another major credit soon, it may be better to wait before cancelling any cards.

How to Cancel a Credit Card Without Hurting Your Credit Score

Cancelling a credit card isn't always bad - it just needs to be done thoughtfully. Here are some tips on how to close a credit card responsibly:

1. Pay Off the Outstanding Balance First

You cannot cancel a credit card with an outstanding balance. Make sure you've cleared all dues, including EMIs on that card and pending fees.

2. Redeem All Rewards and Cashback

Any rewards points, cashback, or vouchers linked to the card may be forfeited upon cancellation. Redeem them before requesting closure.

3. Reduce Overall Utilisation First

Before cancelling a card, try to reduce your balances on other cards. This way, your overall credit utilisation ratio remains healthy even after one account closes.

4. Keep Your Oldest Card Active

If you're thinking of closing your oldest card, reconsider. Age of credit history matters. If possible, keep that card open and use it occasionally to keep it active.

5. Check for Annual Fees or Upgrades

Sometimes, customer support can waive fees or offer to downgrade your card to a no-fee version. It is beneficial to reach out to the respective customer support and ask for a waiver of fees.

6. Get Written Confirmation

Once the card is closed, ask the bank for a written confirmation. It's proof that the account was closed at your request with zero outstanding - crucial for your credit report.

7. Monitor Your Credit Report

After cancellation, check your credit report in a few weeks to ensure the card is marked as "Closed by customer" and there are no reporting errors. If you see any discrepancies, raise a dispute with the bureau immediately.

Alternatives to Cancelling a Credit Card

Not ready to cancel yet? Here are some other ways to deal with an unwanted credit card:

• Convert it to a no-fee card

• Negotiate with the issuer for better terms

• Use it for small recurring charges (like OTT subscriptions) to keep it active

• Store it securely and limit use for avoiding credit card overspending

Remember, cancelling is a permanent action. If you're unsure, these alternatives allow you to maintain your credit health without losing account history.

Final Thoughts

So, does cancelling a credit card hurt your credit score? Yes - but not always, and not severely if done the right way. The key is understanding how your credit score is calculated and taking steps to minimise risk.

If you're planning to cancel a card, do it strategically - pay off balances, keep your credit utilisation in check, and monitor your credit report. Also, use digital platforms like One Consumer that focus on simplifying personal finance. They empower users through financial literacy, a critical first step in making informed credit decisions.

Making informed choices is the best way to protect your financial future - with or without that extra card.

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*Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making any related decisions.

# This is a guest article authored by OneConsumer Services Pvt Ltd. For any enquiries or details, you can visit the author's website.