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Financial Impact Of Closing A Credit Card – All You Need To Know

Having a credit card can become a blessing and a curse by the way you wield it. Using it responsibly can give you many perks like a good credit score and rewards like money back. If not used wisely, it can also make you fall into serious debt. If a credit card is not in use for a long time, some people opt to close the credit card.

Having too many credit cards never bode well. According to experts, the optimum number of credit cards to maintain is two. If you are planning to close your credit card, here are a few things to know:

Do you really need to close your credit card?

You can just put your card away and not use it. Having a credit card with no outstanding credit has a positive impact on your credit score. It can also prove quite beneficial in case of an emergency or the company decides to give better rewards.

Closing a credit card is justifiable if you can’t control your spending and need to remove the temptation. Also, if the annual maintenance fee of the card is too high, it doesn’t make much sense to shell out that much amount for a card you don’t use. Closing unused cards will also prevent misuse or fraud.

Which one of your credit cards should you close and why?


In terms of credit cards, old ones are the best cards. If you have to close a credit card, start with the newest or the one with the smallest available credit.

Newer credit cards lower the length of credit history, so the impact of canceling them will be minimal from that standpoint. That said, your utilization could increase upon cancellation.

Impact on Credit Score

Before closing a credit card, you need to consider how it affects your credit score. Closing a credit card will reduce your credit score because you are reducing your overall credit limit by closing the card. Because of this, your overall credit utilization will go up.

Assume you have two different credit cards with Rs 50,000 limit on each, your total credit available is Rs 1,00,000. If you have swiped your card for Rs 25,000 on one of those cards, your credit utilization is at 25%, which is a healthy one. But if you cancel any one credit card, the credit available drops to Rs 50,000 and your credit utilization will rise to 50%, rendering you “credit-hungry”. This will have an adverse effect on your credit score.

If you have plans to close more than one card, it is advisable not to do it all at once. Do it gradually to minimize the impact on your credit score. Likewise, if you are planning to cancel a credit card, because you are going to open a new credit card with a bunch of attractive rewards, your credit score won’t be affected a lot.

Before Cancelling A Credit Card


  1. Balance transfer

If you want to transfer the outstanding credit card balance to a different account, do it before you raise a cancellation request. Some banks may not allow balance transfer once you request for cancellation of credit account.

  1. Redeem all reward points

Likewise, it is recommended to redeem all your reward points before closing your unused card. Some banks might not allow redemption after applying for cancellation. Make yourself familiar with the credit card cancellation policy because some banks provide an option to redeem the points in a specific period of time even after canceling the card.

  1. Clear outstanding credit balance

Check with your customer-service about your outstanding balance and pay off all dues. If the dues amount to a huge sum, pay it off all at once or make regular weekly or monthly payments. Unbilled amount after the billing cycle should also be paid off in advance.

The bank will not cancel your card unless you have paid all dues. Please note that the dues include not only the expenses incurred on the card, but also all interest, fees, and charges on the card. Keep a record of payments as proof.

  1. Cancel all auto debits

Pull the statements of the previous three months and check all the auto debits and EMIs. Cancel all the auto debits and EMIs. Otherwise, they will bounce once the card gets deactivated. Wait for a cycle and check your statement to make sure that all such transactions are indeed canceled.

Also Read: How To Use Credit Cards Responsibly Without Running Into Debt


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