Cancelling a card: What it will do to your credit history, benefits

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Credit cards offer convenience and rewards but a customer may consider cancelling one due to high fees, limited usage, or avoid overspending. While this decision might seem prudent, it may impact your credit score.

 

“Cancelling a credit card in India can negatively impact your credit score, depending on how it affects key factors like your credit utilisation ratio, credit history length, and credit mix,” said Adhil Shetty, chief executive officer of Bankbazaar.com.

 

“When you close a card, your total available credit decreases, which can increase your credit utilisation if you carry balances on other cards. This may lower your score. Additionally, if the cancelled card is one of your oldest accounts, it can reduce the average age of your credit history, another factor lenders consider,” he said.

 

“Cancellation might still make sense if the card has high fees or offers little benefit. Always pay off outstanding dues before closing and try to keep your oldest, fee-free card active to preserve a strong credit profile."

 

When to cancel a credit card

 

High annual fees: Some premium credit cards come with hefty yearly charges that may not be justified by the perks they offer.

 

Poor spending habits: If a specific card encourages overspending and leads to mounting debt, cancelling it might help you regain control.

 

Too many cards: Juggling several credit cards can become confusing and may increase the risk of financial mismanagement.

 

Divorce or separation: Shared credit cards often need to be closed to simplify financial matters during a breakup or legal separation.

 

Steps to minimise impact on your credit score

 

If cancelling a card is unavoidable, taking these steps can help reduce the negative effects:

 

Pay off outstanding balances: Ensure all dues are cleared before initiating cancellation. Unpaid balances will continue to accrue interest and penalties.

 

Redistribute credit utilisation: If possible, transfer balances or limits from the cancelled card to another active card to maintain a healthy utilisation ratio.

 

Don’t close multiple cards simultaneously: Closing several cards at once amplifies the impact on both utilisation ratios and account age.

 

Keep older cards open: Retain cards with long-standing histories as they positively contribute to your average account age.

 

Monitor your credit report: After cancellation, check that the closure is accurately reflected in your report and ensure there are no errors.

 

Redeem rewards before cancelling: Utilise any accumulated points or benefits on the card before closing it