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Does Cancelling Credit Cards Affect Your Credit Score?
Closing a Credit Card can reduce your Credit Score. This is because you are reducing your overall credit limit by closing a card. As a result, your credit utilization will go up on an overall basis. Assume you have three cards with a total credit limit of Rs. 1.5 Lakhs and you spend Rs. 75,000 in a month. So your credit utilisation is 50%. Now supposing you want to close one of the cards which has a credit limit of Rs. 50,000. Then your overall credit utilisation will be 75% (75,000/1,00,000). This can suggest that you are credit hungry in nature.
Does this mean that you should not close unused cards? No. It is better to close unused cards to prevent misuse or fraud. However, if you wish to close more than one card, you should do so gradually and not all at once. Further, the older the credit history, the better it is for your Credit Score.
Additional Reading: How Long Before Your Credit Score Starts To Improve?
A long track record will help lenders judge your track record and hence determine future behaviour and default chances. Hence you must always look at keeping older Credit Cards alive, and close the newer ones if the need arises. This is because the history of closed unused cards goes off the report after some years. Remember, if you already have a weak score, then work on improving your score first before proceeding to cancel the cards.