Can cancelling a credit card hurt your score? Here’s all you need to know

Closing a credit card is a financially responsible move if it is not being used or carries an annual fee but doing so has consequences. It can hurt your credit score, sometimes by as much as 10 to 50 points.  The impact is not always immediate or severe but it can affect loan approvals, interest rates or even eligibility for premium credit products. Financial experts say the impact depends on which card is being closed, how many cards a person already has, and how well the remaining credit accounts are managed.

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According to Raj P Narayanam, founder and executive chairman of Zaggle, closing a credit card affects three major components of a credit score: utilisation, history and mix.

“Together, these factors can cause a score drop of 10 to 50 points depending on your overall credit profile,” he said.

Why closing a credit card can reduce your score

One of the biggest reasons behind a score drop is the increase in credit utilisation ratio.

This ratio measures how much credit a person is using compared to their total available limit. For example, if someone has total credit limits of Rs 500,000 across cards and uses Rs 100,000, the utilisation ratio stands at 20 per cent. If one card with a high limit is cancelled, the total available credit falls, causing the utilisation percentage to rise even if spending remains unchanged.

Credit bureaus generally prefer utilisation below 30 per cent. Higher utilisation can signal stress in managing debt and may reduce the score.

The second factor is credit history length. Older cards contribute positively because they demonstrate long-term repayment discipline. Shutting down a long-standing card can reduce the average age of credit accounts over time.

Narayanam said the oldest card is especially important because it “anchors your credit history and carries years of positive repayment signals”.

Although closed accounts in good standing usually remain on a credit report for up to 10 years, their eventual removal can shorten the credit profile significantly.

The third factor is credit mix. Lenders prefer borrowers who can handle different forms of credit responsibly, such as credit cards, home loans and personal loans. Closing an active card may weaken this mix slightly, especially for people with limited credit exposure.

Is it ever a good idea to close a card?

There are situations where closing a card may make sense.

Some users may want to avoid annual fees, reduce the temptation to overspend, or simplify finances by managing fewer cards. But experts say cancellation should usually be the last option.

“If avoiding an annual fee is the goal, negotiate a waiver with the issuer before cancelling outright,” Narayanam said.

In many cases, banks are willing to waive fees or shift customers to a lower-cost variant to retain them.

If closure becomes unavoidable, experts recommend cancelling the card with the lowest limit, shortest history and least useful benefits. The oldest or highest-limit card should ideally be retained.

Precautions to take before cancelling a credit card

Experts say a few steps can reduce the impact of card closure:

• 
  Pay down balances on other cards beforehand to keep utilisation low
• 
  Redeem all unused reward points, as many issuers cancel them after closure
• 
  Shift auto-debits and recurring payments linked to the card
• 
  Avoid applying for fresh loans or cards immediately after closure
• 
  Check credit reports later to ensure the account is marked as “closed by customer”

Narayanam noted that a closure marked as “closed by issuer” may create a negative impression among lenders compared to voluntary closure by the customer.

What if the score falls after closure?

A temporary decline in credit score after card closure is not uncommon. However, recovery is usually possible within three to six months if financial discipline is maintained.

Experts suggest focusing on timely repayments and lowering balances on remaining cards. Missing payments after closure can worsen the damage because repayment history remains the single biggest factor in most credit scoring models.

Narayanam advised consumers to keep existing cards active with small regular purchases while avoiding multiple new credit applications in a short period.

“A credit score is a signal, not a verdict. It responds to consistent behaviour,” he said.

Takeaway

Cancelling a credit card is not automatically harmful, but it should not be treated casually either. The decision becomes more sensitive when the card is old, carries a high limit, or forms a major part of a person’s credit history.

For most borrowers, keeping older cards active with controlled usage is often better than shutting them down entirely. Those looking to improve their financial profile may benefit more from reducing spending and paying dues on time rather than trimming the number of cards they hold.