Curated By: Business Desk
Last Updated: September 15, 2023, 18:53 IST
Credit cards can be essential for those looking to manage their finances and want to have a good credit history. However, given the multiple offers by the banks in order to issue more credit cards, people these days have multiple credit cards. These cards remain unused for years due to which people consider closing their credit cards. While it is a simple decision, there may be some potential consequences for the same. In this article, let us explore the right time to close a credit card and its repercussions.
When should you close your credit card?
The unused credit card account should be closed if you have several credit cards, in order to simplify your financial life while ensuring that there is no risk of fraud. Additionally, you should consider closing unused credit cards if they carry any annual fees or other charges. There is no point in paying for a card that you are not using and taking advantage of.
If you’re struggling to control your spending, closing unused credit cards can be a great idea. Moreover, for those who need to take a loan, closing unused credit cards can be beneficial as it gives a better interest rate.
Impact of closing credit card on credit score
Closing a credit card comes with both positive and negative impacts. If the credit card has a balance at the time of closing of the account, there will be an improvement in the credit utilisation rate. The credit utilisation rate is the amount of credit used compared to the total credit limit. The lower the credit utilisation rate, the better the credit score. Moreover, closing a credit card with a history of late payments can help in avoiding further damage to an individual’s credit score.
Let’s discuss the cons of closing a credit card. It reduces the available credit, thereby increasing the credit utilisation rate and decreasing credit score. Moreover, this will shorten the length of the cardholder’s credit history, affecting his/ her credit score. Those with a long credit history will see the average age of their accounts reducing, which again, has a negative impact on your credit score.