For many Indian consumers, unused credit cards often sit quietly in wallets or apps, raising a common question: Should you close them or keep them active? While the instinct may be to cancel cards that are no longer needed, financial experts say the decision is not as straightforward as it appears.
Contrary to popular belief, closing a credit card does not instantly erase your credit history or significantly damage your credit score. However, there are nuances that borrowers should understand before making a move.
Myth Vs Reality: Do You Lose Credit History?
One of the most widespread myths around credit cards is that closing an account wipes out its contribution to your credit profile. In reality, this is not the case.
Closed accounts typically remain on your credit report for up to 10 years and continue to contribute to your credit history during that period. This means your past repayment behaviour and account age are still factored into your credit score calculations.
Even after closure, the account continues to age on your credit report. For instance, if a credit card was active for three years before closure, it could reflect as a 13-year-old account before it eventually drops off your report.
This also aligns with how major scoring models like FICO and VantageScore treat closed accounts: both open and closed accounts contribute to the average age of accounts (AAoA), a key factor in credit scoring.
The Real Impact: Credit Utilisation Matters More
While closing a card does not directly erase history, it can influence your credit utilisation ratio, a critical component of your credit score.
Credit utilisation refers to the percentage of your total available credit that you are using. When you close a credit card, your overall credit limit reduces. If your spending remains unchanged, this can increase your utilisation ratio, which may temporarily impact your score.
For example, if you have two cards with a combined limit of Rs 2 lakh and you use Rs 50,000, your utilisation is 25 per cent. If you close one card and your limit drops to Rs 1 lakh, the same spending pushes utilisation to 50 per cent.
However, this impact is often temporary.
Temporary Dip, Not A Long-Term Problem
Any dip in credit score due to higher utilisation is short-lived.
Credit utilisation has no long-term memory in most scoring systems. If you maintain disciplined repayment behaviour and pay your dues on time, your score can recover quickly.
This means that closing a credit card does not permanently damage your credit profile, especially if other aspects of your credit behaviour remain strong.
When Closing A Card Makes Sense
There are scenarios where shutting down a credit card may be a prudent decision.
Consumers may consider closing cards that carry high annual fees but offer limited benefits, are rarely used and difficult to manage, or pose a risk of fraud if left inactive.
In such cases, simplifying your credit portfolio can improve financial discipline and reduce unnecessary costs.
Additionally, if you have multiple cards and struggle to track payments, reducing the number of accounts may help you avoid missed payments, which have a far more serious impact on your credit score.
When You Should Think Twice
However, experts caution against closing older credit cards, particularly those with a long repayment history.
Older accounts help strengthen your credit profile by improving the average age of accounts. Even though closed accounts continue to contribute for years, keeping long-standing accounts open can offer additional stability to your credit profile.
Lenders often view borrowers with longer credit histories as more reliable, making it beneficial to retain at least one old credit card.
So What Should Customers Do?
For borrowers, the decision to close a credit card should be based on overall financial behaviour rather than myths.
Maintaining a healthy credit profile depends on factors such as timely repayments, controlled borrowing and responsible usage, not simply the number of cards you hold.
It is recommended that users periodically review their credit portfolio to assess whether each card serves a purpose. If a card no longer adds value and you can manage your utilisation effectively, closing it may not significantly harm your credit score.
Closing an unused credit card is neither inherently harmful nor always advisable; it depends on your financial habits and credit profile.
The key takeaway is that credit history does not disappear overnight, and any short-term impact on your score can be managed with disciplined financial behaviour. For most consumers, the focus should remain on maintaining a strong repayment record, managing utilisation wisely and using credit as a tool, not a burden.
