Closing a Credit Card: Is it a good idea?

After pulling yourself out of a sticky financial situation and paying off your credit card debt, you may feel that the only practical next step is to ditch credit cards altogether and never go down that path again. In most situations, however, taking such a drastic step can hurt your credit situation even more.

You may also want to opt for a credit card settlement with your bank or issuer if you cannot pay off your credit card debt.

However, it is advisable to examine how to settle credit card debt before doing so. Closing your credit card has some repercussions and may come back to bite you later – such as when you require a loan.

Let's find out why you should not close your credit card in certain scenarios.

1. Closing a Credit Card that has balance
 

Closing a credit card account with an outstanding balance will lead to a high credit utilization ratio. The formula for determining your credit utilization ratio is to divide the amount of outstanding credit by the number of credit lines available. A good credit utilization ratio is 30% or less. Exceeding 30% can negatively impact your credit score as it indicates potential default or late repayments, which may attract a late fee. This is one of the major reasons you should never close a credit card with an outstanding balance. 

2. Closing your only Credit Card
 

Having the right credit mix is ideal for building a good credit score. A credit mix is nothing but the different sources from where you may have got credit, such as mortgages, loans, credit cards, etc. Credit bureaus look for an ideal credit mix before calculating your current credit score. Therefore, having at least one credit card in your name becomes essential since this will only add to your credit score.

It is advisable to keep your only line of credit open to show you have enough experience. Using your credit card occasionally and charging something on it makes sense if you can avoid defaulting. Always pay off the dues on time to show good credit behavior.

3. Closing your only Credit Card with available credit
 

If you have just one credit card with a credit available, it is indirectly helping you keep your overall credit utilization ratio in check. If you plan to close this credit card, you will be left with other credit cards with balances and a high credit utilization ratio. 

4. Closing your oldest Credit Card account
 

If you close your old credit cards, your average age of credit is likely to shorten. On the other hand, a credit history that extends for a long time (say 20 years or more) indicates a good credit score. It represents your commitment and reliability towards borrowing credit and repaying it on time. It also shows that you can handle credit for a long duration and enhances your credit score. 

5. Closing a Credit Card with the best terms
 

A credit card with good features is hard to let go of, so why close that? If you have a credit card that offers low-interest rates, negligible to no annual fees, or other benefits (such as a good rewards program or other perks), it makes sense to keep that credit card active. Some credit cards also offer different types of insurance coverage. Figure out which of your credit cards offer the best features and perks by comparing them with the ones available in the market. Identify the credit card account with the best features and keep it open.

When to close your Credit Card
 

However, there are some situations when you should go ahead and close your card. These can be one or more of the following:

• A new credit card that is no longer in use, which does not have an outstanding balance (and you have another credit card in hand)
• A credit card provider that suddenly hikes interest rates
• A credit card account with high annual fees
• A credit card with unfavorable terms and conditions 
• When you lose your credit card, or face identity theft, or fraud 

In Conclusion

Closing a credit card could indicate to lenders that you are a high-risk borrower. In this regard, IDFC FIRST Bank's credit cards offer multiple options to suit your credit risk and financial appetite. With great features such as zero annual fees, low APR, low interest rates, and reward points that never seem to expire, IDFC FIRST Bank's credit cards can be a great addition to your credit requirements.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.