New Delhi: Many consumers assume that closing an unused credit card is financially responsible, especially when annual fees begin appearing on statements. However, financial experts warn that shutting down an old or inactive credit card can negatively impact a person’s CIBIL score, even when there are no missed payments or loan defaults.
A drop in credit score after closing an unused card is among the most common and misunderstood credit-related mistakes made by borrowers in India.
Experts say the impact mainly comes from changes to the credit utilisation ratio and the average age of active credit accounts.
How unused card closure affects credit score
When a credit card is closed, the total available credit limit linked to a person’s profile reduces immediately.
This directly impacts the credit utilisation ratio, which measures how much credit a person uses compared to the total available limit across all cards.
For example, if a person has a total credit limit of Rs 5 lakh and currently uses Rs 1 lakh, the utilisation ratio stands at 20 percent.
However, if a card carrying a Rs 2 lakh limit is closed, the total available limit drops to Rs 3 lakh while the outstanding balance remains unchanged. This pushes the utilisation ratio above 33 percent.
Financial institutions generally view credit utilisation beyond 30 percent as a potential sign of financial stress or excessive dependence on borrowed credit.
Older cards strengthen credit profile
Another major factor impacted by card closure is the average age of credit accounts.
Experts note that older credit cards help strengthen a borrower’s credit profile because they reflect a longer repayment history and demonstrate consistent financial behaviour over time.
When a long-held card is closed, it no longer contributes to the calculation of active credit age.
Although closed accounts may continue appearing on a person’s CIBIL report for seven to ten years, their contribution to the “average age of active accounts” effectively stops after closure.
This can reduce the overall credit score, especially for individuals with limited credit history.
Why CIBIL score matters
A strong CIBIL score plays an important role in loan approvals, credit card eligibility and interest rates offered by banks and financial institutions.
Lenders often use the score to assess a borrower’s repayment capacity and financial discipline before approving loans such as home loans, car loans or personal loans.
A lower score can reduce the chances of quick approval or result in higher borrowing costs.
When closing a card may make sense
Financial advisors say there are situations where shutting a credit card could still be the right decision.
If a card carries a high annual fee but offers benefits rarely used by the customer, maintaining the account may not be financially worthwhile.
Similarly, some users hold multiple cards with nearly identical rewards and features. In such cases, experts recommend retaining the older card while closing newer or redundant ones to preserve credit history.
Security concerns may also justify closure.
If a card repeatedly experiences fraudulent transactions or security breaches and the issuer fails to resolve the issues satisfactorily, customers may choose to close the account for financial safety.
Tips before closing a credit card
Experts recommend checking the overall impact on credit utilisation before cancelling any card.
Consumers are also advised to clear outstanding balances completely and consider downgrading to a lower-fee card instead of full closure wherever possible.
Maintaining older accounts with low or zero usage can sometimes be more beneficial for long-term credit health than shutting them entirely.
Conclusion
Closing an unused credit card may appear harmless, but it can affect crucial components of a person’s credit profile and lead to a decline in CIBIL score. Financial experts advise consumers to carefully evaluate the impact on credit history and utilisation before deciding to shut older accounts.