In today’s digital age, almost everyone uses credit cards for various purposes, such as lounge access, fuel, and shopping.
However, many people consider closing unused credit cards to reduce unnecessary expenses. But is it profitable to do so? Let’s find out.
Credit Utilization Ratio: The Credit Utilization Ratio (CUR) is the percentage of the credit card limit that has been used, and it plays a crucial role in credit utilization.
Financial experts recommend keeping this ratio below 30%. If you close a credit card, your overall credit limit decreases, increasing your CUR. This can hurt your credit score.
For example, if you have three credit cards with limits of Rs. 1 lakh, Rs. 2 lahks, and Rs. 3 lahks, totaling Rs. 6 lahks, and you’ve used Rs. 1.80 lahks, your CUR is at 30%.
If you close the third credit card, reduce your limit to Rs. 3 lakhs, and continue using it at the same rate, your CUR will reach 60%.
Impact on Credit History: Closing a credit card with a good history can negatively impact your credit score and make it harder to get loan approvals. Therefore, it’s essential to consider the impact on your credit history before closing a credit card.
Consideration of Offers: Even if you don’t retain credit cards often, sparingly may offer unique benefits such as free lounge access, discounts on branded items, and movie tickets. It’s essential to weigh these additional benefits before closing a credit card.
Choosing Which Credit Card to Close: Managing multiple credit cards can be challenging, and you may struggle to make timely payments.
In such cases, it’s better to eliminate unnecessary cards with low offers, limited credit limits, or high annual fees. Ensuring that closing these cards does not negatively impact your credit history is essential. Additionally, it’s advisable not to acquire too many credit cards at once.