How Closing a Credit Card Account Affects Your Credit Score?

Posted on Tuesday, August 29th, 2023 | By IndusInd Bank

If you have a credit card that you no longer use or need, you might be tempted to close it and get rid of it for good. However, before you do that, you should be aware of how closing a credit card account can affect your credit score and your overall financial health. 

Your credit score is a three-digit number that reflects your creditworthiness and is based on your credit history. It is calculated using various factors, such as your payment history, the amount of debt you owe, the length of your credit history, the types of credit you have, and the number of new credit inquiries you have made. 

Closing a credit card account can impact some of these factors and lower your credit score in the following ways: 
 

• It can increase your credit utilization ratio.  
  A credit utilization ratio is the percentage of your available credit that you are using. For example, if you have a total credit limit of ₹1 lakh across all your cards and you have a balance of ₹20,000, your credit utilization ratio is 20%. Ideally, you should keep this ratio below 30% to maintain a good credit score. When you close a credit card account, you reduce your total available credit and thereby increase your credit utilization ratio. This can hurt your score as it indicates that you are relying more on debt. 

• It can reduce your average age of accounts.  
  Your average age of accounts is the average length of time that you have had all your credit accounts open. It is calculated by adding up the ages of all your accounts and dividing by the number of accounts. For example, if you have three credit cards that you have had for 1 year, 3 years, and 5 years respectively, your average age of accounts is (1+3+5)/3 = 3 years. Generally, the longer your average age of accounts, the better your credit score as it shows that you have a long and stable credit history. When you close a credit card account, especially an old one, you lower your average age of accounts and potentially lower your score as well. 
   
• It can affect your credit mix.  
  Your credit mix is the diversity of credit types that you have, such as credit cards, personal loans, car loans, home loans, etc. Having a variety of credit types can boost your score as it demonstrates that you can handle different kinds of debt responsibly. When you close a credit card account, you reduce your credit mix and possibly reduce your score as well. 

However, closing a credit card account does not always have a negative impact on your credit score.

In some cases, it might even improve your score or have no effect at all. For instance: 
 

• If you have a high number of credit cards and closing one does not significantly affect your total available credit or average age of accounts, it might not hurt your score much. 
   
• If you have a low or zero balance on the card that you are closing and you continue to pay off your other balances in full and on time, it might not hurt your score much. 
   
• If you have a delinquent or defaulted account that is hurting your score and closing it helps you avoid further damage or fees, it might improve your score in the long run. 
   

Conclusion

Therefore, before you decide to close a credit card account, you should consider the pros and cons carefully and weigh them against your financial goals and situation. You should also check your current credit score and monitor it regularly to see how it changes over time. 

If you are looking for a new or better credit card that suits your lifestyle and spending habits, you should check out the range of IndusInd Bank Credit Cards that offer exclusive benefits and rewards. Whether you are looking for cashback, rewards points, travel perks, dining discounts, entertainment offers, or more, IndusInd Bank has a card for you. You can apply online and get instant approval.  To learn more about IndusInd Bank Credit Cards and apply for one today by clicking here. 

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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.