For many, cancelling an old credit card seems the most logical step, especially when it has been years since one used it. It is one of the simplest ways to declutter your wallet and simplify financial accounts. But what seems harmless can have drastic consequences for the credit score and overall financial health. Here's why you should think twice before cutting ties with your oldest credit card.
1. Credit History Duration
Perhaps one of the factors that the lender will use when calculating your score is the period for which you have been running your credit. Borrowers who have a more extended credit history and are more likely to access their credit account often have good credit risks since it shows they are reliable. Closing an old credit card lowers the average age of your credit accounts, which can further damage your credit score and reduce the possibility of future loans or even good interest rates.
For instance, imagine you’ve had a credit card for 15 years and another for just five years. Cancelling the older card would drastically reduce the average age of your credit history, affecting your creditworthiness.
2. Higher Credit Utilisation Ratio
Another big factor in your credit score is credit utilisation, or what percentage of your available credit you are actually using. In general, the lower your utilisation ratio, the better your score, so you are not overly reliant on credit.
Closing an old credit card eliminates its available credit limit. This can increase your credit utilisation ratio, especially if you have balances on other cards. For example, if you have two cards with a combined limit of Rs 2 lakh and you are using Rs. 40,000, your utilisation ratio is 20 per cent. Closing one card with a Rs 1 lakh limit would push your ratio to 40 per cent, which could lower your credit score.
3. Loss of Established Trust with Lenders
An old credit card may be a symbol of years of association with the issuing bank. This experience builds trust since the bank will notice that you have managed your credit responsibly for such a long time. Closing such a card would cut the association, thus making you less likely to get good offers or loans from the same bank later on.
4. Hidden Advantages You Are Missing
Chances are many of the old credit cards contain benefits that you may not know you possess. These might involve lower interest rates, waived annual fees, and rewards programs perhaps not equalled by new ones. In closing an old card, you will be forfeiting these advantages as well. Many older cards still have superior conditions for emergencies, such as cash withdrawals and balance transfers.
When Cancelling May Be Justified
There are times when it may make sense to cancel an old credit card:
High Annual Fees: If the fees charged by the card outweigh the benefits, then it may make sense to close it. Always try to downgrade to a no-fee version before cancelling.
Temptation to Overspend: If the presence of the card leads to unhealthy spending habits, then it may be better to cancel it and avoid debt.
Fraud Concerns: In rare cases where the card’s security is repeatedly compromised, cancellation may be necessary.
How to Cancel an Old Credit Card Wisely
If you’re certain that cancelling your old credit card is the best option, follow these steps to minimize the impact:
Pay-Off Balances: Ensure the card has a zero balance before initiating cancellation.
Use Other Cards Strategically: Spread your spending across remaining cards to maintain a low credit utilization ratio.
Open a Replacement Card First: If you’re looking to simplify your accounts, consider opening a new card with better terms before closing the old one. This can help maintain your credit limit.
Notify the Issuer: Call your bank to cancel the card formally and confirm that there are no outstanding dues.
Track Your Credit Report: Make sure that closure has been done right on the credit report, so your score isn't hurt any worse than necessary.
Cancelling an old credit card can have a big impact on your financial well-being. This could be considered a decision point by the evaluation it gives on implications to your credit history, the utilization ratio, and so many other things. In most cases, one should keep it open and use it at a sparingly needed rate just to maintain one's credit score and financial flexibility.
