Planning to close that credit card you haven’t used in six months? Think again.
Closing a credit card is not that simple. Not, in terms of, the cancellation process but its after-effects. When you cancel your credit card, it has a direct impact on your credit score. Now, you would not want to play around with your credit score, would you? Let us see how cancelling your credit card, and credit score are related.
Constituents of credit score
Credit score = credit history + credit utilisation + new credit acquired + outstanding credit amount + credit mix
When you cancel your credit card, you tamper your credit history and credit utilisation.
This is the age of your credit. Credit history gives financial institutions insight into your credit-handling abilities. So longer the credit history, more proof you have about managing your credit. A good credit score could be the result of efficiently servicing and closing old loan accounts. After you have closed a credit card account in good standing, it stays in your credit report for up to ten years only.
Having a designated credit limit, yet using decidedly less, or none of it lowers your credit utilisation ratio. It is the ratio of credit balances and total available credit. Ideally, you should maintain a credit utilisation ratio of 30% or less. This means you should not go all out and avail the credit available to you. It reflects a borrower’s credit hungry behaviour to lenders.
So, when should you consider closing your unused credit card?
High annual fee
Most credit card issuers charge a yearly fee for using the card. Paying the fee for an unused credit card that has been lying in your drawer for many months is a waste of money. Although its necessary for credit score, spending money for an unused credit card is not worth it. Alternatively, if the unused card has had a good credit history, you may want to start using it again to maintain the credit score.
No extra benefits
You took the credit card only to avail a hefty discount on your first purchase. After that, the credit card may no longer be useful to you. Say, as a sign-up bonus, you got life insurance and Mediclaim. After some time, the terms changed, and the insurance was valid only for a year. The additional benefits may not be lucrative or useful to you anymore. In such cases, you could consider closing the card.
Too many credit cards
If your wallet is filled with credit cards, choosing the most-used and beneficial card is the right choice. Spend time evaluating how it can influence your credit utilisation ratio and credit history.
Cancelling a credit card doesn’t mean just cutting it off with a pair of scissors. Once you have evaluated the need and its after-effects, contact the issuer to close the credit card officially.