Nowadays, most people prefer having multiple credit cards due to many reasons such as more credit, more rewards & benefits, etc. In such cases, one or more of their cards remain unused for years and the idea to close that credit account might come to their mind. If you are also one of the people who are thinking of closing a credit card, there are some points that you must consider before making a decision. Sometimes closing an unused credit card can be the right decision but can also be a bad idea sometimes. It can affect your Credit score, but still if closing a card seems to be necessary, you must surely do that. This article will help you understand how closing a credit card can impact your credit score and when is it right to close one. Read on to know more:
How Closing a Credit Card Impacts Your Credit Score?
Your Credit Utilization Ratio Increases
Your credit utilization ratio is the ratio of the Credit limit you spend to your total credit limit. In order to maintain a good credit score, this ratio should never go higher than 30%, i.e, you should not use more than 30% of your total credit limit as it can have a negative impact on your credit score. When you close a credit card, your total credit limit decreases, and hence your credit utilization ratio increases. An increased credit utilization ratio can damage your credit score and it can decrease by some points.
For example, you have 2 credit cards with the first one having a limit of Rs. 1 lakh and the second one having a limit of Rs. 50,000, then your total credit limit is Rs. 1.5 lakhs. If you spend Rs. 40,000 every month using your credit card, your credit utilization ratio is less than 30%. Now, if you don’t use your second card and close it, then you are left with a total credit limit of Rs. 1 lakh and you use Rs. 40,000 out of that. It means that your credit utilization ratio has now increased to 40%, which is not at all good for your credit score.
The Average Age of Your Accounts Decreases
The average age of your credit accounts makes 10% of your credit score. To maintain a good score, it is advisable not to close your credit accounts as it can decrease the length of your credit history and hence impacts your credit score. If the account you are planning to close is your oldest credit account then it is probably a very bad idea. So, make sure to consider this factor before you make any decision.
When Is It Right To Close a Credit Card?
Following are the conditions in which it will be better for you to close an unused credit card account:
- When the annual fee on a credit card is very high and you hardly use it, it will be better for you to close that credit card as it makes no sense to keep paying for something that is not even in use.
- If you have so many credit cards and you think that closing one of them will not hurt your credit score by increasing the credit utilization ratio, your idea of closing a credit card can make sense.
- If you are someone who is most likely to overspend with multiple cards, you should close the account that you use rarely. By doing so, you can avoid debt consolidation and keep yourself financially healthy.
Key Points To Keep in Mind
- If you are not closing an unused credit card account, make sure to keep checking for its fees & charges so that you can close it if the issuer has started charging a high annual fee on it.
- Make sure that you are using a card with maximum benefits and the unused credit card is the one with the least perks. Some people unknowingly ignore a credit card that has amazing benefits and keep using the one with fewer advantages.
The decision of closing a credit card is not necessarily wrong always, but it is better not to do so until you are paying a high annual fee on an unused card. If you are responsible and wise enough to manage multiple credit cards together, there is no harm in keeping a credit account open even if it is not in use. However, there are some conditions (as mentioned above) in which it is instead better to close an unused account. Still, you need to analyze everything thoroughly before making any decision as it can affect your credit score. Just make sure that you are not having any loss due to something that you don’t use.