Many people are cautious when it comes to managing their credit cards, and for a good reason. Closing an old credit card might seem like a good way to avoid unnecessary debt, but it can actually harm your credit score. Many users are unaware of this, and even banks might not explain the consequences clearly. Here’s what you need to know about how closing an old credit card can affect your credit history and overall financial health.
Impact on Your Credit History
When you close an old credit card or loan account, you lose the positive impact that the account has on your credit history. One of the important factors in calculating your credit score is how long you’ve been making regular payments. The longer you maintain your credit card or loan account, the stronger your credit score becomes. By keeping an old account open, you show that you are trustworthy to lenders, making it easier to get a loan in the future.
Why You Shouldn’t Close Your Old Credit Card?
Closing an old credit card can lead to a decrease in your total available credit limit. If your spending habits don’t change, your credit utilisation ratio may increase. This could harm your credit score because a higher credit utilisation ratio indicates that you are using a large percentage of your available credit. Experts recommend keeping your credit utilisation ratio below 30 per cent. For example, if your credit limit is Rs 100,000 your credit usage should not exceed Rs 30,000.
Temporary Drop in Credit Score
In some cases, when you close an old account, your credit score may temporarily drop. This is because closing the account lowers the average age of your credit accounts, making your credit history appear shorter. Additionally, closing an account may signal financial instability to potential lenders, making them less likely to trust you. If the closed account was opened recently, this could further harm your creditworthiness.
