How to close credit cards without hurting your CIBIL score

A credit card can be a great backup tool to tackle any financial emergencies. However, there are instances when users may consider closing or cancelling it to avoid over spending.

While closing credit cards, customers must remember that it can often impact the CIBIL score.

That is because the credit card shows the amount of credit one can avail of.  So, closing means they are actually reducing the amount of money available for spending.

According to Rohit Garg, co-founder and chief executive officer, Smartcoin, if customers have used only one credit card and they want to cancel it, it could prevent them from having a credit mix on the portfolio which is one of the parameters in the CIBIL score calculation.

"It would not affect the current score but may not be helpful in improving the credit score," Garg explains.

Another important factor is the repayment history, which decides the credit score.

Garg explains this further.

“If customers have a consistent payment history, keeping account active can retain the account’s good standing. When customers close a credit card account, they lose the available credit limit on that account. This makes the credit utilization ratio (CUR) or the percentage of the available credit they are using, jump up—and that's a sign of risk to lenders because it shows customers are using a higher amount of available credit,” he opines.

Nityanand Sharma, CEO and co-founder, Simpl Technologies suggests credit card users with multiple credit cards to close the additional cards post making sure that all the auto-payments are discontinued and that customers have redeemed the awards if any.

Moreover, Sujay Das, chief risk officer – MoneyTap says, a lot of people are not aware that they might owe the credit card company some fees, like membership fees, bounce fees, or late fees which would be an insignificant amount that can be missed easily. When this remains unpaid for a long time, it becomes a significant overdue amount and hurts the credit score.

Das recommends customers to do a careful check for all hidden costs and all payments that they might owe the credit card company.

"While it may take 7 years for any late payments associated with a credit card account to disappear from a credit report, a good credit history will remain on the credit report longer. A closed account that was in good standing will remain on the credit report for 10 years. This will help move the majority of credit information to positive, with time," Sharma explains.

In order to retain the CIBIL, Das suggests users to transfer their balance to another credit card, and repay the amount at a lower interest rate.

Anil K Pinapala, CEO, Vivifi recommends closing out the newer credit cards first and then slowly moving to the older ones. Closing a card that customers have been using for a long time may result in a negative impact on the credit score.

"While using that old card, customers might have made a timely payment which would have resulted in a positive CIBIL score. Cancelling that card will also delete the CIBIL score history and it will start afresh” illustrates Pranjal Kamra, CEO – Finology.

The timing of the closure of the credit card is also very important.

Pinapala of Vivifi advises customers to close the credit cards when they don’t have a lot of credit card debt outstanding.

"Closing a credit card when customers have a lot of other credit cards debt will result in higher utilization as their credit limit reduces with the same debt outstanding. Hence, it is advised to close a credit card when customers' credit card outstanding across all cards is the least which will have minimum impact on the credit score," Pinapala explains.

Closing a credit card might increase the Credit Utilisation Ratio (CUR). Kamra explains this with an example.

"Assume a customer has two credit cards with a limit of Rs 50,000 each. Now he/she swipe one of the cards for spending Rs 25,000. That means he/she has spent Rs 25,000 out of Rs 1,00,000. This would make the CUR to be 25 percent, which is generally a good CUR. Now, when he/she closes one of the cards, this would increase the CUR to 50 percent (Because available credit is now reduced to 50,000) which is generally not considered a good number," he opines.

An ideal CUR, as per Kamra, is considered to be between 20 - 30 percent.

"This can be rectified by spending less on the existing card or asking the bank to increase the spending limit," he advises.

To calculate the credit utilisation ratio, customers can divide the total of all the credit card balances by the total of all the credit limits; the resulting percentage is the utilization ratio.