You haven’t used a credit card in over a year, and then the annual fee hits your statement. The only thing you would do is to cancel your card. You call the bank, request closure, and the account is shut within days.
But, this will not help. Days later, your CIBIL score will drop by nearly 40 points. This will make you think that there were no missed EMIs. No delayed payments. No new loans. Yet your credit score takes a hit simply because you closed a card you barely used.
This is one of the most common and misunderstood credit score mistakes consumers make.
Two factors impacting credit profile:
When you close an unused credit card, two major factors in your credit profile change immediately. One is the your credit utilisation ratio and second is your average account age.
Credit utilisation ratio refers to how much credit you are using compared to your total available credit limit.
If you have total credit limits of Rs 5 lakh across all cards and currently use Rs 1 lakh, your utilisation ratio is 20%.
But if you close a card with a Rs 2 lakh limit, your total available credit drops to Rs 3 lakh while your outstanding dues remain the same. Your utilisation ratio instantly jumps to over 33%.
Lenders typically view utilisation above 30% as a sign of financial stress or overdependence on credit.
The second major factor is the average age of your credit accounts.
Older credit cards strengthen your score. They demonstrate a long history of responsible repayment behaviour. When you close a card you’ve held for several years, that account stops contributing to your active credit age calculation.
While closed accounts may remain visible on your CIBIL report for seven to ten years, their contribution to the “average age of active accounts” effectively ends once the card is shut.
In which cases you should close your card?
If a card charges a steep annual fee but offers benefits you rarely use, keeping it may not make financial sense.
Many users accumulate multiple cards with nearly identical features. In such cases, keeping the older card and closing the newer or redundant one is advisable to preserve credit history.
If a card has experienced repeated fraudulent transactions and the issuer fails to resolve the issue satisfactorily, closure may be necessary for financial safety.