How to Close Your Credit Cards without Hurting Your CIBIL Score?

Are you unable to decide whether to close your credit cards? If yes, you must also be concerned about the negative effects of closing a credit card.

It is generally advised that you should not close your credit card account. Doing so may hurt your credit score. Furthermore, closing credit cards can also increase your credit utilisation ratio, which would decrease your CIBIL score.

However, there are certain situations where closing your credit card may be necessary. It is also possible to safely close your credit cards without lowering your CIBIL score.

Before we tell you how to close your credit card, let’s look at the reasons why you closing your credit card may lead to a negative effect on your credit score. Let’s get into it!

How Closing Your Credit Cards Affects Your Credit Score

Understanding the impact of closing a credit card on your credit score is essential in India’s financial environment. Here’s a simplified breakdown to guide your decision:

• Credit Utilization Ratio: This is about how much of your available credit you’re using. Closing a credit card lowers your total credit, which might raise your credit utilisation. This is important if you have debts on other cards. Try to keep this ratio under 30%. Lenders might view higher ratios as risky. Calculate this by dividing your total card balances by your total credit limits.
• Per-Card and Aggregate Credit Utilization: Your credit score considers how much you use each card’s limit and all your cards’ combined limits. Both the individual card usage and overall usage matter. Lower is generally better. When closing a card, consider how it affects both these areas.
• Credit Mix Diversity: This refers to the variety of credit you have, like loans and credit cards. Shutting a credit card can make your credit mix less diverse, which could affect your score. This matters a lot if it’s your only credit card.
• Age of Credit Accounts: Lenders look at how long you’ve had credit. Closing a card can shorten the average age of your accounts, potentially affecting your score. The immediate effect might be small, but it’s vital to consider the long-term impact on your credit history.
• Impact on Future Credit: Think about when you’re planning to close your card. If you’re applying for loans or new credit cards soon, it’s better to wait before closing your current card. Doing so could drop your credit score for a while.

How to Close Your Credit Card Without Hurting Your Credit Score?

Follow these tips to close your credit card so that it has a very little negative effect on your credit score:

• Calculate the Impact on Your Credit Score

The first and foremost thing to do is to consider whether closing the credit card will deteriorate your credit scores adversely. Suppose you are closing the only credit card you possess and have never taken loans. In that case, the credit information bureau will no longer get information on your credit utilisation and credit repayment history. Thus, you will gradually lose your credit score.

On the other hand, if you have good repayment behaviour, keeping your account active retains its good standing. Also, cancelling or closing credit cards will not hide any irregular repayments from your credit history.

Another major factor to consider is that closing a card reduces your available credit and this can lead to an increase in your credit utilisation ratio. If this ratio does not increase too much when closing one of your credit cards, you can do so safely.

• Clear All Outstanding Dues

It is absolutely important to clear off your outstanding dues before closing off your card. It will be impossible for you to request the closure of the credit card account with the bank before clearing all remaining dues.

Thus, before deciding to close your credit card account, pay all your dues as well as any penalties that are due.

• Carefully Go through the Closure Policies

It is crucial for you to read all the policies of the bank regarding its credit card closure procedure. The closing procedure of every bank is different. Thus, read all policy-related documents carefully and check how you can close off your credit card account without having to pay extra charges or penalties.

• Call off Auto-Payments

Go to your bank’s website and cancel the auto-payment instruction for utility bills or other subscriptions. If you fail to do it, then the bank will continue to charge you on the closed card. Then, you will miss the payments and the utility service providers might levy a penalty for overdue payments.

• Redeem Your Rewards and Benefits

Most credit cards have much to offer regarding reward points, cashbacks and other benefits. These can be redeemed by cash or for travel, shopping and other services. After closing the credit card, all rewards and benefits that you had accumulated will be gone.

Thus, before you close off your credit card account, redeem all your rewards and benefits. You can also try to redeem them as a statement of credit which will substantially reduce your due amount payable.

• Inform Your Bank of the Cancellation

Contact your card service provider and request for cancellation of the credit card. You will have to confirm before that you have absolutely no due payments or penalties. Even if the customer care representative tries to offer you new rewards, you will have to pursue the request for the closure of your account.

• Follow-Up In Writing

You must keep a record of your request for closing the credit card in writing. Thus, follow up on your previous request with a written application for the closure of your account. This might be a very important document to keep for the future, in case of any negative repercussions on the credit report or CIBIL score.

• Check Your Credit Report

You should get a free copy of your credit report. This is necessary to check whether the credit card account has successfully been closed. It is extremely crucial because any mistakes or inconsistencies will remain in your credit report and credit repayment history for the next 7-10 years.

Pros of Cancelling a Credit Card

Here are some of the advantages of cancelling your card:

• Prevents Over Expenditure

Often having easy access to a credit source like a credit card leads to unnecessary expenditure. As a result, you get into a vicious cycle of debt which you often may be unable to repay. The accumulation of debt may lead to bankruptcy.

Thus, if you want to play it safe, then the best thing for you would be to close your credit card.

• Reduces Your Overall Debt

Having multiple credit cards increases your total debt, which in turn leads to an increased debt-to-income ratio (DTI). The higher your DTI, the more difficult it will be to get a loan from any bank or non-banking financial company.

• Reduces the Chances of Identity Theft

In this age of technology, having multiple credit cards also increases your risk of getting hacked. Through your credit card, hackers can steal all your sensitive card information and use it for fraudulent activities. Thus, having fewer credit cards reduces your chances of becoming prey to fraud.

• Retains the Payment History

The best thing is that even when you close your credit card, your payment history would not be erased from the credit reports. Thus, if you had good repayment behaviour, it will be beneficial for your credit score and will remain on your credit report for up to 10 years.

Cons of Cancelling a Credit Card

There are also several problems associated with closing a credit card. Some of them are given here:

• Increases Credit Utilisation Ratio

The credit utilisation ratio is calculated by determining how much available credit you currently utilise amongst the total available credit across different cards. When you close a credit card, the total credit amount is reduced. This results in a higher credit utilisation ratio. A high credit utilisation ratio makes it harder to avail loans or new credit cards.

• Shortens Your Credit History

The length of your account history plays a pivotal role in establishing your credit repayment behaviour and thus, your creditworthiness. If you have a good repayment track record, having a short record of such behaviour would not be of much help. That is why it is advised not to cancel your older cards, as it can adversely affect your CIBIL score.

• Impacts Credit Score

Closing a card often affects your credit score. Since closing a credit card account increases the credit utilisation ratio due to the reduction of the total available credit limit, it often has a negative effect on the credit score in the short term.

• Reduces Available Credit Limit

As soon as you close a card, the overall credit limit available to you will be substantially reduced. Furthermore, you will also lose out on the rewards and other benefits that your credit card provides.

Signs For You To Close Your Credit Card

In financial management, recognising when to reduce your credit card holdings is vital. Here are key signs indicating it might be time to consider cancelling some of your credit cards:

High Annual Fees Not Justified by Rewards: If your credit card’s annual fee isn’t balanced out by the rewards, perks, or cashback it offers, it may be more of a financial burden than a benefit. Annual fees can sometimes be overlooked or underestimated during application, making such cards prime candidates for cancellation.

Store Cards with Poor Terms: Store cards often come with low credit limits and high-interest rates, leading to a high credit utilisation ratio even for modest spenders. These cards might not offer substantial benefits, making them less advantageous.

Expiring Points, Rewards, or Miles: Cards that come with rewards or miles that expire or get forfeited due to inactivity might not be the best choice, especially if there are better options available with rewards that don’t expire.

No Rewards on Starter Credit Cards: Some starter credit cards, used primarily for building credit, offer no rewards. If your credit score has improved since you got such a card, you might have outgrown its utility and could benefit from a card with better rewards.

Secured Cards After Credit Improvement: If you’ve used a secured card to rebuild your credit and your financial situation has improved, it might be time to move on to an unsecured card, which often comes with better terms and no required security deposit.

Overspending Temptations: Cancelling a credit card can be a step towards more responsible financial management and budgeting for those struggling with overspending.

Cards with Low Credit Limits: Cards with low credit limits can disproportionately affect your credit utilisation ratio, even with small purchases. This might give lenders the impression of irresponsible spending.

Newest Cards with Unfavorable Terms: If you’ve recently opened a card that doesn’t meet your expectations or has unfavourable terms, it might be more strategic to cancel it sooner rather than later. Cancelling newer cards can be less detrimental to your credit score than closing older accounts.

Alternatives to Close Your Credit Card 

If you’re considering alternatives to closing a credit card, here are some practical and straightforward solutions:

Negotiate or Waive Annual Fees: Contact your credit card issuer to discuss lowering or even waiving the annual fee. Many companies are open to adjusting fees to keep their customers satisfied.

Secure or Pause Your Card: To control overspending, place your card in a secure location or consider pausing your account temporarily. This approach helps you manage spending habits without closing the account.
Maintain with Small, Regular Charges: Keep the card active and avoid closure by using it for small, recurring expenses, like a magazine subscription or streaming service. Just remember to pay these off on time to avoid late fees or interest.

Final Words

You might choose to discontinue a credit card for different reasons. However, you must always weigh the pros and cons associated with your decision and act accordingly. If you have decided to close a card, keep in mind the above pointers to minimise its effects on your credit score.  

Frequently Asked Questions