August 24, 2025 · 12 mins read
Santosh Kumar
Credit cards are credit instruments. They help users in securing credit on the promise of making payments within the stipulated time as per the contractual commitments between the credit card user and the lending institution.
Now, cancelling a credit card comes with its complexities, issues, and problems. It can surely impact your credit score, depending on factors such as credit utilization ratio, credit history length, any pending payments, past defaults, and your overall credit mix.
Closing a credit card is not always the wrong move, but it should be done based on strategies. It can impact your credit score by increasing your credit utilization ratio, shortening your credit history, and reducing your credit mix.
For instance, someone with a credit score of 780 (considered excellent in India) could see a dip if they cancel an old, high-limit card. With credit card dues rising at a slower pace—15.6% this year compared to 32.5% last year—and both online and offline spending seeing a dip in February, it’s clear consumers are becoming more cautious.”
If a card no longer aligns with your financial goals—say it has high fees or tempts overspending evaluate if keeping it adds value. The focus should be on responsible usage and maintaining a healthy credit profile rather than the number of cards you hold.
Also Read: When to Convert Credit Card Payments into EMI?
Now deciding on when to cancel your credit card can be a tricky call. Still, there are several crucial points that you should consider and keep in mind while making the best decision in this regard, according to your financial situation.
High annual fees: Premium credit cards, coming along with substantial yearly charges, may not offer benefits that justify the cost. That is why you should always consider the pros and cons carefully. Take a pen and paper and write down the actual annual charge you will pay for maintaining a credit card. This will help you in making a good decision.
Overspending habits: If a card encourages high spending leading to debt, cancelling it might help regain financial control. For this, you need to carefully check and see for yourself how much you are spending using a particular card; surviving on credit is never a good idea.
Managing multiple cards: Having several credit cards can be confusing and increase the risk of financial mismanagement, hampering financial growth. A lot of credit cards simply means a lot of credit lines, which opens up the potential for financial fraud, building up of debts, along with constant stress to follow up with your expenses. That is why you should always consider closing out avoidable credit cards to keep things under control.
1: Clear off outstanding balances: Ensure that all dues are cleared before you initiate the process of cancellation to avoid accruing any penalties and associated interest costs.
2: Redistribute credit utilisation: Check and transfer balances or limits from the cancelled card to another active card. This will help you in maintaining a healthy credit utilisation ratio.
3: Never close multiple cards at short notice: Do remember, closing several cards at once can significantly impact your credit utilization and account age. That is why you should close cards after decent intervals to avoid damage to your credit score.
4: If possible, keep older credit cards active: This is important because retaining cards with long-standing histories can be immensely positive for your overall credit profile and even boost your credit score.
5: Carefully monitor and check your credit report: Post cancellation, carefully check and verify that the closure is accurately reflected in your credit report, and also check for any minute errors.
6: Redeem reward points before closing the card: Check and redeem any accumulated points or benefits on the card before deciding on closing it. This is important as it will help you in getting the best possible benefit from your credit card that has been built over months and years based on your payment history.
7: By considering all these factors and steps, you can make the right decisions about cancelling credit cards while reducing the potential risks and effects on your credit score.
Even cards you barely use can play a role in the calculation of your credit score. These examples may help you decide when to keep a card open.
Also Read: Online Shopping with Credit Cards – Safety Tips
Credit scores often factor in the age of your oldest account, so an individual account that’s been managed well over time usually has a positive impact on your credit. Plus, your oldest account contributes to the average age of all your accounts – another factor that can benefit your credit score.1
Credit scoring models typically reward having a mix of credit types – like credit cards, loans, and lines of credit. If you only have one or two accounts, holding on to a credit card boosts that mix, which can benefit your score.
A credit card account that’s in good standing – meaning one that shows responsible repayment or has been paid off with no missed payments – contributes positively to your credit history, and therefore may be worth keeping, even if it gets little use.
If a temporary dip in your credit score is a cause for concern, consider some alternatives before you close a card:
Say you have a card with great rewards that you use all the time, but you’re concerned about your utilization. Instead of canceling the card you want to keep, try this. This may lower your utilization ratio.
When a card provider offers several, you may be able to ask for a product change. This usually allows you to switch to a card in your provider’s collection with a lower interest rate or annual fee while keeping the original account history on your credit report.
You might also ask about a retention offer. Card providers sometimes lower fees or offer additional rewards to get cardholders to stay.
Product changes and retention offers may require a little legwork on your part – and there’s no guarantee your provider will accommodate the request. But the effort may be worth it if you end up keeping a card that helps your credit score.
If you're worried the provider might close the card due to inactivity, consider setting up an automatic payment to pay one recurring bill. Your best bet may be a small bill for a service you use regularly, like a streaming subscription. That way, your credit report retains the total credit available, and you’ll be more likely to notice if there are any changes to the amount due.
Also Read: Credit Card Settlement vs Full Repayment – What’s Better?
Deciding to deactivate a credit card can result in a credit score setback if not considered carefully. This is why experts suggest letting credit cards remain open. However, their high annual fee or other reasons may propel owners to request a cancellation.
While there are several valid reasons for cancelling a credit card, one must consider the repercussions. For starters, it is vital to understand that cards with the highest credit limits can cause the most damage and affect one’s credit utilization ratio. The credit utilization ratio is one of the key criteria for determining one’s credit score and refers to the percentage of a borrower’s total available credit that they are currently using.
For example, Mr X has three credit cards with a total spending limit of Rs. 5 lakh per month. He only utilizes Rs. 2 lakh on average every month from his credit limit. Here, the average credit utilization ratio of Mr X is 40% (Rs. 2 lakh/Rs. 5 lakh*100).
While lowering the credit utilization ratio can help improve one's credit score, closing a credit card will not have a similar effect. For instance, in continuation of the above example, say Mr X has a limit of Rs. 2 lakh for a credit card, and he wants to discontinue this card. Now, his credit limit is down to Rs. 3 lakh. Assuming that his credit spending remains at the same level, his credit utilization ratio would change significantly.
New credit utilization rate = INR 2 lakh/INR 3 lakh*100 = 66.67%.
According to experts, the credit utilization ratio should be maintained at around 30%. A higher credit utilization ratio signifies that the person depends more on credit, which can be a worrying sign for lenders.
Moreover, the credit utilization ratio can impact up to 30% of a credit score. Hence, having a high credit utilization ratio can push the holder to the brink of harming their credit score. In the above example, after Mr X closed one of his cards, his ratio of utilization jumped to two-thirds, exposing him to the risk of denting his credit score.
Another aspect that impacts the credit score is the age of the credit cards. The older the card, the better the credit score. While it may not have as significant an impact as the credit utilization rate, it holds some significance.
Also Read: What Is a Grace Period on a Credit Card?
1: If it gets rid of a high credit limit. Having access to a lot of credit can hurt your credit score because it increases the risk that any new lenders would face if you applied for another card or loan. By cancelling your credit card, you'll reduce this risk, which could also improve your credit score.
2: If it shows you've settled outstanding payments. Before you can close a credit card account, you'll need to make sure the balance is cleared. So, if you have previously had late payments or defaults recorded on this account, closing it could show you're taking control of your debts.
3: If it helps you make other payments on time. Once you've closed your credit card account, you don't have to think about the bill each month. If this makes it easier to deal with other accounts, it could improve your payment history and your credit score.
1: If it were your only credit account. Cancelling a credit card when you don't have any other loans or credit account limits the amount of information you'll have on your credit file. That means your credit score could drop or remain unchanged until you apply for a new card.
2: If you have a lot of recent applications. Applying for a lot of credit cards (or other credit accounts) over a few months increases the level of risk for your existing and potential lenders. It may suggest that you're struggling with debt or that you're jumping from one credit card to another in order to take advantage of introductory offers. If you cancel your card and have a recent history of multiple applications, you may have trouble getting another new card approved.
3: If making payments on your other accounts is still a challenge. While cancelling a credit card might look like the right direction, you still find that it's difficult to make payments on your other accounts. This could lead to more late payments or defaults that lower your credit score. If you need help dealing with your credit accounts, you can get free support by calling Financial Counselling. They will provide you with the right ideas.
So, does cancelling a credit card hurt your credit score? Yes, but not always, and not severely if done the right way. The important thing is understanding how your credit score is calculated and how taking steps can reduce risk.
If you're planning to cancel a card, do it strategically - pay off balances, keep your credit utilisation in check, and monitor your credit report. Also, use digital platforms like One Consumer that focus on simplifying personal finance. They empower users through financial literacy, a critical first step in making informed credit decisions. Making informed choices is the best way to protect your financial future - with or without that extra card.
Also Read: Contactless Credit Cards – Are They Safe?
Yes, it is better to close an unused credit card.
You can't close a credit card with an outstanding balance. In case you want to close the credit card, you will have to clear the balance that may be on the card.
Yes, closing a credit card could affect your credit score. You can, however, minimize the effect by ensuring that you follow all the necessary formalities.
The best thing is to close the credit card the right way.
It depends on the bank’s terms and conditions. While some banks require the cardholder to send the cut credit card to the bank to initiate the cancellation request, other banks recommend that the customers cut the card into pieces once it is cancelled, instead of discarding it as it is.
If used in a strategic manner, closing your unused credit cards can help improve your credit score. One reason for closing an old account and cancelling your credit card is to avoid any annual fee that you may incur.
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