As this year comes to an end, many people review their finances and try to simplify things before stepping into a new year. This often includes closing old or unused credit cards. While the decision may feel practical and well-planned, it can sometimes affect your credit score in ways you may not expect. Here's how it works-
People usually close credit cards for sensible reasons. Many switch to newer cards that offer better rewards, cashback or travel benefits. In some cases, banks reduce benefits or increase annual fees, making older cards less useful. So, closing down a card is not a sign of financial trouble. It is often just a clean-up exercise.
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Still, it is important to understand how it reflects on your credit profile.
Does closing a card affect your credit mix?
Your credit score is partially shaped by the types of credit you use. This includes secured loans like home or car loans, and unsecured options like credit cards and personal loans. This balance is called your credit mix.
If you close a credit card, especially when it is your only unsecured credit, this balance can shift. When that happens, your credit score may drop slightly. To avoid this, make sure you are not removing an entire category of credit from your profile.
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Why your credit utilisation may increase?
Another key factor is credit utilisation, which is the percentage of your available credit that you use. Closing a card reduces your total credit limit. If your spending stays the same, your utilisation goes up. When it crosses the ideal 30 per cent mark, it can negatively affect your score. Checking your remaining limits before closing a card can help prevent this.
For people new to credit, closing a card too soon can slow down credit building. Using a card responsibly for at least a year helps create a stable credit history.
In most cases, any drop in score is small and temporary. With regular payments and controlled spending, your score usually recovers within a few months. Planning ahead ensures your financial clean-up does not undo your good credit habits.
{News Ei Samay does not provide investment advice anywhere. Investment and trading in the share market or any field involve risk. Proper study and expert advice are recommended beforehand. This news is published for educational and awareness purposes.}
