New Delhi. As soon as December, the last month of the year, comes, most people start planning their year end financial planning. During this time, expenses are reviewed, investments are accounted for and many people also decide which bank account or credit card is no longer of use to them. In such a situation, the most common question that arises is that if the old credit card is closed, will the credit score fall? The answer is, yes, there can be an impact, but there is no need to panic. Let us understand the whole truth in simple language.
Why do people close old credit cards?
Often people decide to close a credit card when they get a new card with better rewards, cashback or offers. Many times the bank reduces the benefits of the card or increases the annual fee, due to which the card is not as beneficial as before. Some people want to avoid having too many cards so that they can maintain control over their expenses. All these reasons are valid, but before taking a decision it is important to understand the impact on the credit score.
Why does closing a credit card affect your score?
Credit score is decided on the basis of many factors and credit cards play an important role in them.
1. Impact on credit mix
Credit mix means what kind of loans and credits you have. If you have a home loan and a credit card, it is considered a good balance but if you close the only credit card, you will be left with only the secured loan. This can weaken the credit mix and have a negative impact on the score.
2. The age of credit history decreases
Old credit card makes your credit history longer. The longer and cleaner the history, the better the score. If you close your oldest card, your average credit age goes down. This is the reason why many times a decline in score is seen as soon as the card is closed.
3. Credit utilization ratio may increase
Credit Utilization Ratio (CUR) tells you how much of your total credit limit you are using. A ratio less than 30% is considered good. Suppose you have two cards and one is closed, then the total limit will reduce. If the expenses remain the same, the ratio will increase and this can directly harm the credit score.
4. Creation of new credit history may stop
For those who start building their score by taking a credit card for the first time, the card is very important for them. If the card is closed within the first 6 months, the process of building credit history stops. This may make it difficult to get a loan or another card in future.
Should I worry about my credit score falling?
In most cases the fallout from closing a credit card is minor and temporary. If you keep paying bills on time, control spending on other cards and keep credit utilization below 30%, the score improves again in a few months.
How to reduce losses?
If you have an old card with lifetime free, it is better to keep it instead of closing it. You can make small transactions with that card every few months, so that it remains active. If there is an annual fee on the card, then talk to the bank and try to get it changed to lifetime free. Apart from this, if the utilization is increasing by closing one card, then the option of increasing the credit limit of the other card can also be adopted.
