Credit Card Closure Risks: How Cancelling a Card Can Increase Credit Risks

Balasahana Suresh
Many people think that closing an unused credit card is a harmless way to simplify finances. However, cancelling a credit card can unintentionally hurt your credit score and borrowing capacity if not done carefully. (bankbazaar.com)

1. How Credit Card Closure Affects Credit Score

a) Credit Utilization Ratio Goes Up

  • Credit Utilization Ratio = Total Credit Used ÷ Total Credit Limit
  • When you close a card, your total available credit decreases, but your outstanding debt may remain the same.
  • Example:
    • You have 2 credit cards with limits ₹2 lakh each (total ₹4 lakh).
    • Current balance: ₹50,000
    • Utilization = 50,000 ÷ 400,000 = 12.5% (good)
    • If you close one card (new total limit ₹2 lakh), utilization = 50,000 ÷ 200,000 = 25%, which may negatively impact your credit score.
Tip: Keep credit utilization below 30% to maintain a healthy credit score.

b) Average Age of Credit Accounts Decreases

  • Credit history length is a major factor in credit scoring.
  • Closing your oldest credit card reduces the average age of your accounts, which can lower your credit score.
c) Impact on Credit Mix

  • Credit scoring models favor a mix of credit types (credit cards, loans, etc.).
  • Closing a credit card reduces your available revolving credit, which may slightly affect your creditworthiness.
2. When Closing a Credit Card Is Risky

High Credit Limit Cards

Cancelling a card with a large limit can increase your credit utilization sharply.

Old Cards

Closing the oldest card reduces the average account age, which may hurt your score, especially if you have a short credit history.

Cards With Benefits/Rewards

Losing reward points, cashback, or annual perks can be costly if you don’t redeem them before closure.

3. When It’s Safe to Close a Credit Card

  • No balance: Ensure the card has zero outstanding balance.
  • Multiple cards with similar credit: Closing one won’t significantly affect total available credit.
  • No ongoing automatic payments linked to that card.
4. How to Minimize Credit Risks When Cancelling a Card

Pay Off the Balance Completely

Avoid leaving even a small unpaid balance.

Redeem Rewards

Use accumulated points or cashback before closure.

Close the Newer, Lower-Limit Cards First

Preserve older, higher-limit cards to maintain credit history and lower utilization.

Monitor Credit Score After Closure

Check your credit report 1–2 months after closing to see the impact.

Increase Credit Limit on Remaining Cards

If needed, request higher limits on other cards to keep utilization low.

5. Key Takeaways

Risk

Impact

How to Mitigate

Increased credit utilization

Score may drop

Pay balances; keep other cards active

Reduced average account age

Score may drop

Close newer cards first

Loss of rewards

Missed benefits

Redeem before closure

Reduced credit mix

Minor impact

Maintain multiple types of credit

💡 Bottom line: Closing a credit card isn’t just a paperwork step — it can affect your credit score, future loan approvals, and borrowing power. Always evaluate the impact on utilization, age, and benefits before making a decision.

 

Disclaimer:

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.

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