Cancelling Your Credit Cards? It Can Pull Down Your CIBIL Score

Your credit score is a determinant of your credit worthiness. It is calculated based on the money you can spend versus the money you owe your lenders. In simple words, if your line of credit available is higher than the total loan outstanding, your CIBIL score will be higher.

Credit card cancellation impacts your credit score: If you cancel a credit card, your score will be negatively affected. That is because your credit card shows the amount of credit you can avail. If you have five different credit cards and if you close one of them, you are actually reducing the amount of money available for spending. Hence, it is bound to impact your credit score. True, the money was never there physically, but it was a line of credit available.

The math behind the impact: If you have two different credit cards with Rs 50,000 limit on each, your total credit available is Rs 1 lakh. If you have swiped your card for Rs 25,000 on one of those cards, your credit utilisation is at 25%, which is a healthy one.

But if you cancel one credit card, the credit available drops to Rs 50,000 and your credit utilisation rises to 50%, an unhealthy number. Hence, the credit score will be affected.

Is there a smart way to do it?
Well, one should not have more than one or two credit cards. Now that you have made up your mind to cancel the unwanted credit cards that you don’t use, do it gradually, over a period of time. While doing it, make it a point to increase the credit limit of the cards you want to hold. That way, you are not knocking off your line of credit. Ensure that you close the cards with lower credit limits instead of higher limits.

About the author: Rajiv Raj is the director and co-founder of www.creditvidya.com.