credit card
In today’s era, credit card is no longer just a means of shopping, but it has become a part of your entire financial identity. Bank loan giving companies and financial institutions decide whether to give you a loan or not by looking at your credit history. In such a situation, many people close their credit cards thinking that what is the point of keeping them when they are not being used. But this decision can harm your CIBIL score.
When you close one of your credit cards, your total available credit limit is reduced. Suppose, you have two cards and the total limit of both is Rs 2 lakh. If you spend Rs 40,000 every month, your credit utilization ratio will be 20%. But as soon as you close a card and the limit comes down to Rs 1 lakh, the same expenditure suddenly starts showing at 40%. Banks consider it a high risk.
Why is there a direct impact on CIBIL score?
Many factors are considered in determining credit score. The most important thing is how much of your limit you are using. A high utilization ratio indicates that you are more dependent on borrowing than necessary. Additionally, if you close the old card, your long credit record also gets shortened, thereby weakening the stability of the score. Also, having a variety of credit is considered good for your score. This balance also gets disturbed due to closure of the card.
Never close credit cards?
If a card has a high annual fee or its benefits are of no use to you, it may be wise to close it. But if the card is free, it is better to keep it active and use it occasionally for small expenses. Always keep credit card usage within 30% of the limit. Pay every bill on time and in full. Keep your oldest card active and avoid closing the card without any reason. These small habits can keep your credit score strong in the long run.