Impact of Credit Card Cancellations on Your Credit Score

You have a new credit card and feel your wallet is stuffed with a few old ones. What is the use of keeping unused cards? You may think that it is better to close it. While there is nothing wrong in closing them, make sure you don’t hurry to cancel it as closing a credit card can impact your credit score particularly when it has been open for many years. Do you want to know how closing your credit card impacts your CIBIL score? This article would answer your query with insights on how credit card closure impacts your CIBIL scores and how credit card holders work towards resolving their credit card issues.

How does credit card closure impact my CIBIL score?

Once you close your credit card, you can no longer use it to make purchases or payments. This action impacts your credit history, as the credit bureaus stop receiving information about your card and your credit history.

A credit card acts as a loan from a bank, so closing it means the loan is completed. This can impact your credit score in several ways:

Increased Utilisation Ratio

• Cancelling your credit card can increase your credit utilisation ratio. This ratio is the amount of credit you're using compared to your total available credit.
• Higher credit utilisation can be risky for lenders, as it indicates you’re using a larger portion of your available credit.
• The recommended credit utilisation rate should be less than 30%, according to experts.

Calculation of Credit Utilisation

To calculate your credit utilisation rate: Divide the total of all your credit card balances by the total of all your credit limits.

Impact on CIBIL Score

• Your CIBIL score can drop immediately upon cancellation of your card due to changes in your credit utilisation ratio.
• A longer payment history generally benefits your credit score, while missed payments remain on your credit report for five to seven years.
• Even though your credit score may drop after cancelling your card, you can still improve it within a few months by making timely bill payments.

Planning for New Credit Applications

If you plan to apply for a credit card loan or any new credit shortly, it’s advisable to wait before cancelling your credit card. This can help prevent a temporary dip in your CIBIL score.

In which situation should you cancel your credit card?

The following instances can be considered while closing your card but also know that they benefit you:

• a high annual fee on your credit card and fewer benefits
• a high interest rate card and you want to keep a balance
• managing debts becomes a problem while having credits keeps making you spend beyond your means
• get a regular or rewards card instead of your existing student ca

While the above discusses the reasons for the closure of your credit card, here are some pointers asking you to keep your credit cards:

• it is an age-old account on your credit report
• getting credits in the future will be difficult and reduce credit history. So, closing the credit card or having fewer credit accounts does not help.
• if there is not much requirement to use your credit card, you may think of cancelling it.

Is it possible to close a credit card without damaging my CIBIL score

If you are thinking of closing your credit card account but also doubt your CIBIL Score, then go through these suggestions so that you have no issues in future cancelling your credit card:

• Check that all your payouts are cleared before you learn about the impact of credit card cancellation
• If you have any outstanding rewards in case, you have a rewards credit card redeem them
• In case of an auto-payment set on your credit card, you can stop it or transfer it to another available card so that you don’t miss payments.
• Inform the credit card issuer that you want to close your card and confirm in writing that the account was closed at your request. Follow up to confirm cancellation giving all details like your name, phone number, address, credit card account number and any other details.
• It is very important to destroy your credit card once it is closed. Snap it into pieces and dump it in separate trash bags to make it difficult for any potential fraud to find the pieces of your credit card.

Are there any alternatives to closing a credit card?

In case you don’t plan to close your credit card and explore alternative ways to resolve the issues that are reasons for cancelling your card then here are some discussed below:

• If the annual fee is too high for you and this is a reason for cancelling your credit card, you could speak with your issuer and ask for a lowering or wavering of the annual fee. Some companies will do it as they have a policy to retain their customers
• A trick not to overspend could be to hide it in a secure place or pause your credit card for a few months. You may develop a good habit of not overspending this way
• If you use the credit very sparsely and want to close, you can keep it open by subscribing to a small monthly subscription of your desired magazine or book. However, make sure you don't forget the payment due date and make payments on time. 

You must think strategically before cancelling your credit card and must have a good reason to go ahead. The impact of cancelling a credit card shall not improve your CIBIL score besides removing a negative account from your account report.

FAQs

Q1. What is the impact on CIBIL scores if a credit card is cancelled?

Ans. A credit card account if closed impacts negatively on your CIBIL score. It reduces the credit amount and raises the utilisation ratio which is the amount you are indebted as a percentage of your total available credit.

Q2. In how many days can a credit card be closed?

Ans. Closure of credit cards between the cardholder and issuer takes around seven working days.

Q3. Is there a penalty for closing a credit card?

Ans. If the card issuer fails to complete the process of closure of a credit card within seven working days, the issuer will have to pay a penalty of Rs 500 per day to the customer till the closure of the account provided there are no outstanding in the account according to RBI.

Q4. Are there any new RBI guidelines for credit card activation?

 Ans. A cardholder must activate the new credit card within 30 days so that the issuing company gets an OTP to activate it. In case the cardholder does not activate his card within the stipulated time, the issuing bank shall deactivate the card within seven days without charging any additional fee.