The impact of closing a credit card account on your credit score

Posted on Friday, September 8th, 2023 | By IndusInd Bank

Credit cards enable you to pay for your purchases, earn rewards, and build your credit history. But what happens when you decide to close a credit card account? Does it affect your credit score? And if so, how? 

The answer is not straightforward, as different factors may influence the impact of closing a credit card account on your credit score. Here are some of the main aspects to consider before you make the decision to close a credit card account. 

Credit Utilization Ratio 

One of the most important factors that affect your credit score is your credit utilization ratio, which measures how much of your available credit you are using. Ideally, you want to keep this ratio as low as possible, preferably below 30%. This shows that you are not overusing your credit and can manage your debt responsibly. 

Closing a credit card account can increase your credit utilization ratio, especially if you have a high balance on other cards or if you close a card with a high credit limit. This can lower your credit score, as it indicates that you are relying more on your credit and may have difficulty paying it off. 

For example, suppose you have two credit cards, each with a limit of ₹50,000. You have a balance of ₹10,000 on one card and ₹5,000 on the other. Your total available credit is ₹1,00,000 and your total balance is ₹15,000. Your credit utilization ratio is 15%, which is good for your credit score. 

However, if you close the card with a ₹10,000 balance, your available credit will also drop to ₹50,000 but your balance will increase to ₹15,000. Your credit utilization ratio will jump to 30%, which is the upper limit of what is recommended for your credit score. 

Therefore, before you close a credit card account, you should consider how it will affect your credit utilization ratio and try to pay off any outstanding balances on other cards. 

Length Of Credit History 

Another factor that affects your credit score is the length of your credit history, which reflects how long you have been using credit and how well you have managed it. Generally, the longer your credit history, the better your credit score, as it shows that you have more experience and stability with credit. 

Closing a credit card account can reduce the length of your credit history, especially if you close an old card that you have had for a long time. This can lower your credit score, as it reduces the average age of your accounts and makes your credit history look shorter and less diverse. 

For example, suppose you have three credit cards, one that you opened 10 years ago, one that you opened 5 years ago, and one that you opened 1 year ago. The average age of your accounts is 5.3 years (10 + 5 + 1 / 3), which is good for your credit score. 

Now, if you close the card that you opened 10 years ago, your average age of accounts will drop to 3 years (5 + 1 / 2), which is not as good as before. 

However, if you close the card that you opened 1 year ago, your average age of accounts will increase to 7.5 years (10 + 5 / 2), which is better for your credit score. 

Therefore, before you close a credit card account, you should consider how it will affect the length of your credit history and try to keep older accounts open. 

Credit Mix 

Another factor that affects your credit score is your credit mix, which reflects the diversity of your types of credit accounts. Having a variety of credit accounts, such as loans and cards, can improve your credit score, as it shows that you can handle different kinds of debt. 

Closing a credit card account can reduce your credit mix, especially if you have few other types of accounts or if you close a unique type of card. This can lower your credit score, as it makes your credit profile look less varied and less adaptable. 

For example, suppose you have four types of accounts: a home loan, a car loan, a personal loan, and a travel rewards card. Your credit mix is good for your credit score, as it shows that you have experience with different kinds of debt and benefits. 

Therefore, before you close a credit card account, you should consider how it will affect your credit mix and try to maintain a balance of different types of accounts. 

Conclusion 

Closing a credit card account can have both positive and negative effects on your credit score, depending on various factors such as your credit utilization ratio, length of credit history, and credit mix. Before you make the decision to close a credit card account, you should weigh the pros and cons and evaluate how it will impact your overall financial situation. 

If you are looking for a new credit card that offers you world-class lifestyle benefits along with never expiring rewards points, you may want to check out the IndusInd Bank Credit Cards. IndusInd Bank offers a range of credit cards that suit different needs and preferences, such as travel, shopping, entertainment, dining. Moreover, you can apply for an instant credit card online with IndusInd Bank in just three easy steps and get instant approval. Apply for your credit card online here! 

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.