Many people assume that closing an old credit card or loan account is a smart move to keep their finances tidy.
But what if this decision actually lowers your CIBIL score instead of boosting it?
1 Like
-
Length of Credit History: Since this is one key feature responsible for forming a substantial part of your CIBIL score, closing off the old accounts will lead to a reduction of the average ages of the accounts, which will cause a negative impact on your score.
-
Credit Utilization Ratio: By closing a credit account, it reduces your available credit, which in turn increases the credit utilization ratio. A higher ratio is a riskier scenario for lenders and this could diminish one’s score.
-
Diversity in Account Types: Any variation in credit types-therefore also credit scores-benefits your score. Closing down old accounts leads to a vanishing variety, leading to a decrease in scores.
-
Effect on Credit Mix and Overall Score: While the act of “cleaning up” by closing accounts may sound worthwhile, it mostly does a disservice owing to Credit Mix and Credit Utilization.
In summary, before closing any old accounts, carefully weigh the long-term impact on your CIBIL score, as maintaining a healthy credit history and low credit utilization will always work in your favor.
I think the credit age is one of the most important factors while deciding your credit worthiness and credit score. I would advice you not to cancel your first or oldest credit card and keep using it active.
If it is a paid card, you could probably ask for a LTF conversion as banks usually offer the same if you try to cancel a card.
1 Like