If you have a credit card that you no longer use and are planning to cancel it, you must take into account the effect this might have on your finances and credit score. Generally, closing or cancelling a credit card has negative impact on your credit score. However, it does not mean that you should never close a card; what you must do is strategize and take careful decisions.
Closing any unused credit card account directly affects you in the following ways:
- Rise in Credit Utilisation Ratio (CUR): This is the ratio of your credit that is currently in use toyour total available credit. This includes the credit utilisation data of all your loan or credit accounts. It is generally advised to maintain a low CUR and your unused credit cards play an important role in lowering this ratio. If you cancel one of yourcards, the total available credit is reduced due to which the CUR rises. As CUR is given the second highest weightage during credit score calculation, closing a card negatively impacts your credit score.
- Decrease in Your Average Credit Age: Your credit history is determined by all your loan accounts, including the oldest as well as the newest. It is better to have a longer credit history or age as it shows that you are more experienced with credit. So, the older credit cards, even if they are unused, contribute towards increasing your credit age. Closing such an account can decrease both your credit age, and consequently lower your score.
- Loss of Unique Benefits: Each credit card comes with a set of features which are unique to it. For example, if you are thinking of closing a co-branded credit card, you will lose the benefits that the card offers on the collaborated brand. Hence, it is advised to understand your spending pattern along with a vision of how your expenses might change in the near future. Based on this, you should decide whether closing a card would be the right decision.
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To determine whether you should close your unused credit card or not, you should first list out its pros and cons.
When Not to Cancel
Before applying for card cancellation, check whether your credit card has any annual fee. In case it does not, then it is generally advised to refrain from closing the credit account. Such a card does not increase your expenses and at the same time can be kept as an emergency credit line.
If you own the credit card for a long time and it charges a nominal fee, then you should still check for ways by which you can make up for the fee through card benefits. Any credit card which you have owned for a long time can be beneficial to establish a good credit history.
When to Cancel
If the unused credit card has a high annual fee with insufficient benefits, then you can consider cancelling it as it will only drain your finances.
You can also consider closing your credit card account if you own multiple credit cards and find it difficult to manage and keep track of your expenses. Several credit cards, if not managed with discipline, may portray you as credit hungry or even be detrimental to yourcashflows. However, in such cases, you should try to cancel the newest credit card in place of the older one, whenever possible to reduce the negative impact on the average age of your credit history.
There are several aspects that play a role in deciding whether you should cancel your unused credit card or not. In some cases, closing such a credit account can cause more damage than good, so it is advised to keep the older credit cards active. Before you decide to cancel your card, you must try to request a limit increase on your existing cards so that your net credit utilisation does not increase which will be good for your credit score in the longer run.
So, you must closely analyse both positive and negative aspects of closing your unused credit card. You should first try to understand how you can maximise the rewards and benefits on that card and if those justify the annual fee that is charged on that card. At the same time, determine how much your credit score will be impacted on closing the card. The final decision will vary depending on the individual needs and the card features.