Closing old credit accounts is a decision that can highly impact your credit score, yet many people are unaware of its consequences. As many Indian consumers look for ways to improve their credit health, it’s crucial to understand the effect that closing old accounts can have on your credit profile. Here are some of the negative impacts one can have on their credit score if they decide to close the account.
Effect On Credit History
When you close an old credit card or personal loan, you’re essentially removing a history of consistent repayments from your credit profile. This history is a key factor in determining your credit score. The more consistent your repayment history, the better your credit profile looks to lenders, as it directly reflects your creditworthiness. Recent studies show that keeping old accounts open, even if unused, helps maintain a strong credit report and can lead to a better credit score.
Impact On Credit Utilisation Ratio
Another significant consequence of closing accounts is its effect on your credit utilisation ratio. This ratio compares your credit card balances to your available credit, and it plays a critical role in maintaining a healthy credit score. When you close an account, you reduce your available credit, which may cause your utilisation ratio to rise, particularly if your spending habits remain the same.
Experts recommend keeping your credit utilisation ratio below 30 per cent for optimal credit health. For example, if you have a credit limit of Rs 1 lakh, your credit utilisation should not exceed Rs 30,000. A lower ratio indicates that you’re not overly reliant on credit, which helps with securing better terms for future credit and maintaining discipline in managing personal loan EMIs.
Temporary Drop In Credit Score
It’s important to note that closing an account can lead to a temporary dip in your credit score. This happens because it lowers the average age of your credit accounts and may increase your credit utilisation ratio. Even if the closed account was in good standing, it can make you appear riskier to lenders, especially if you’ve opened several new accounts recently.
To maintain a healthy credit score, it’s essential to prioritise a strong repayment history and ensure your credit utilisation ratio stays below 30 per cent. These simple practices can also help you avoid hard inquiries on your credit report.
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Manage Your Credit Accounts
While closing an account can sometimes be necessary, such as due to high fees or poor service, the key lies in managing your credit accounts wisely. If you must close an account, consider closing newer accounts instead of the oldest ones. This approach can help minimise the negative impact on your credit score, as older accounts contribute more positively to your credit history.
