Short Answer
Closing unused credit cards can reduce the total available credit limit, which may increase credit utilization and lower the credit score. Even if the card is not used, it still contributes to the overall credit limit.
It can also affect the length of credit history, especially if the card is old. While closing unused cards may simplify finances, it can have a negative impact if not done carefully.
Detailed Explanation:
Closing unused credit cards impact
Closing unused credit cards may seem like a simple decision, but it can affect the credit score in several ways. One of the main impacts is on credit utilization. Even if a credit card is not being used, it still adds to the total available credit limit. When such a card is closed, the total credit limit decreases.
For example, if a person has a total credit limit of ₹1,00,000 across multiple cards and is using ₹20,000, their utilization is 20%. If an unused card with a ₹40,000 limit is closed, the total limit becomes ₹60,000. Now the same ₹20,000 usage results in about 33% utilization. This increase can negatively affect the credit score.
This shows that unused cards still play an important role in maintaining a lower utilization ratio. Closing them can make the credit profile appear riskier to lenders.
Effect on credit score and history
Closing unused credit cards can also affect the length of credit history. If the card being closed is an old account, it contributes to a longer credit history. Closing it may reduce the average age of accounts over time, which can slightly lower the credit score.
Another effect is on the credit mix. Having multiple credit cards shows the ability to manage different accounts. Closing unused cards reduces the number of active accounts, which may slightly affect the credit mix and overall profile.
Even though the impact may not always be very large, it can become noticeable if the closed card had a high credit limit or long history. Lenders prefer borrowers with a strong and stable credit profile, which includes a good balance of credit accounts.
When closing unused cards is okay
Closing unused credit cards can be acceptable in certain situations. If the card has high annual fees and provides no useful benefits, closing it may be a good financial decision. It can help save money and simplify account management.
If a person has too many credit cards and finds it difficult to manage them, closing some unused ones can reduce confusion and risk of missing payments. However, it is important to choose which cards to close carefully.
Before closing a card, it is better to reduce balances on other cards to keep utilization low. It is also advisable to avoid closing the oldest account unless necessary, as it affects credit history.
In some cases, instead of closing the card, a person can keep it open and use it occasionally for small purchases. This keeps the account active without increasing financial burden.
Conclusion
Closing unused credit cards can increase credit utilization and reduce credit history length, which may lower the credit score. Although it can simplify finances, it should be done carefully after evaluating its impact. Proper planning helps maintain a strong credit profile and financial stability.