How to close credit cards without hurting CIBIL score

With department stores, shopping malls, and shops all offering lines of credit, it can be way too easy to have a collection of credit cards with each card offering a variety of rewards and cashback. That said, handling multiple credit cards may not always be possible and a user may consider closing or cancelling a few of them to avert overspending.

While this may look like a smart move, it’s vital to understand that closing a card can also impact your CIBIL.

“That is because the credit card shows the amount of credit one can avail of. So, closing means you are actually reducing the amount of money available for spending,” said Rohit Garg, co-founder and chief executive officer, Smartcoin.

Also, if you have used only one credit card and you want to cancel it, it could prevent you from having a credit mix on the portfolio which is one of the parameters in the CIBIL score calculation.

Another important factor is the repayment history, which decides the credit score. If you have a consistent payment history, keeping the account active can retain the account’s good standing. When you close a credit card account, you lose the available credit limit on that account. This makes the credit utilisation ratio (CUR) or the percentage of the available credit surge. And, this will show that you are using a higher amount of available credit.

The obvious question is: How to close your cards without impacting your CIBIL score.

For starters, closing the newer credit cards first and then slowly moving to the older ones is a smart move, say experts

"Closing a card that you have been using for a long time may result in a negative impact on the credit score. While using that old card, you 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," said Pranjal Kamra, CEO — Finology.

It's better to close the credit cards when you don’t have a lot of credit card debt outstanding.

"Closing a credit card when you have a lot of other credit card debt will result in higher utilisation as the credit limit reduces with the same debt outstanding. Hence, it is advised to close a credit card when your credit card outstanding across all cards is the least which will have minimum impact on the credit score," Anil K Pinapala, CEO, Vivifi said.

Closing a credit card might increase the CUR. Let's look at an example:

Mr Y has two credit cards with a limit of Rs 1 lakh each. Now he swipes one of the cards for spending Rs 50,000. That means he has spent Rs 50,000 out of Rs 2 lakh. This would make the CUR to be 25 percent, which is generally a good CUR. Now, when he closes one of the cards, this would increase the CUR to 50 percent (Because available credit is now reduced to Rs 1 lakh) which is generally not considered a good number.

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

In order to retain the CIBIL, you can also transfer your balance to another credit card, and repay the amount at a lower interest rate.