Cancel Credit Card Without Hurting Your CIBIL Score – A Step-by-Step Guide

Credit cards are convenient, but sometimes cancelling one becomes necessary. Whether simplifying finances or managing high fees, it's important to know how to cancel a credit card without harming your CIBIL score.

Understanding CIBIL Score

Before cancelling your credit card, it's important to understand how your CIBIL score works and how it is affected by your credit behaviour.

Your CIBIL score is a three-digit number that represents your creditworthiness. It is calculated based on your credit history, repayment behaviour, and credit utilisation ratio. The score ranges from 300 to 900, with a higher score indicating better creditworthiness.

Several factors influence your CIBIL score, including:

• Credit utilisation ratio: The percentage of your available credit that youre using.
  

• Credit history length: The longer your credit history, the better your score.
  

• Repayment behaviour: Timely payments help improve your score, while missed or delayed payments can hurt it.

Why Do People Cancel Their Credit Cards

There are various reasons why you might want to cancel credit card. Some of the most common reasons include:

• High annual fees: Some credit cards come with high fees that you might not be willing to pay if you're not using the card regularly.
  

• Better options available: You may find a credit card with better rewards, lower interest rates, or more benefits that make your existing card redundant.
  

• Debt management: If you're trying to manage your debt and simplify your finances, cancelling cards that you dont use frequently can help.
  

• Credit card debt: If you have accumulated debt on a particular card, it might be tempting to cancel it. However, cancelling a card while having unpaid debt on it may have a negative impact on your credit score.

How Does Cancelling a Credit Card Affect Your CIBIL Score

There are several ways that cancelling a credit card can affect your CIBIL score, depending on your existing credit profile and how you manage the process:

Credit Utilisation Ratio

Your credit utilisation ratio is calculated by dividing your outstanding balance by your total credit limit. This indicates the percentage of your available credit being used.

• Cancelling a card with a high limit reduces your available credit, raising your credit utilisation ratio.
  

• For example, if you have two cards offering you a credit limit of ?1,50,000 in total then cancelling a ?1,00,000 limit card leaves you with ?50,000 available credit. Now, if you have spent ?50,000 via both cards, your credit utilisation ratio is 33.33% (?50,000 / ?1,50,000) but upon card cancellation, the same ?50,000 balance now uses 100% of your available credit. This increases your credit utilisation ratio, which can negatively impact your CIBIL score.

Credit History Length

Your CIBIL score is also influenced by the length of your credit history. A longer credit history generally indicates responsible credit use and can improve your score.

Account Type Mix

Your credit score is also affected by the mix of credit accounts you hold, such as credit cards, personal loans, home loans, etc. If you cancel a credit card, it could potentially affect this mix if you have very few credit accounts.

Debt-to-Income Ratio

If you have debt on the credit card you're planning to cancel, this could affect your debt-to-income ratio, which is another important factor in credit scoring. A higher ratio could signal financial stress, which could lower your credit score.

Steps to Cancel Credit Card Without Hurting Your CIBIL Score

While cancelling a credit card can have an impact on your CIBIL score, its possible to minimise the negative effects if you follow these steps:

Pay Off Any Outstanding Balances

Before cancelling your credit card, pay off any outstanding balances. Leaving a balance will still affect your credit score. If you have multiple cards, focus on paying high-interest debt or transferring balances to a lower-rate card.

Reduce Your Credit Utilisation Ratio

Before cancelling a card with a high limit, reduce your credit utilisation by paying down debt on other cards. For example, if you owe ?50,000 across cards, paying down a portion helps prevent a spike in your credit utilisation ratio after cancellation.

Transfer or Redeem Your Rewards

Redeem any rewards, like cashback or points, before cancelling your card, as some may expire or be non-transferable. Ensure you make full use of your accumulated rewards.

Keep the Card Open if Its Your Oldest Card

If the card you're cancelling is one of your oldest, it's better to keep it open. Closing it can reduce your credit history length, negatively impacting your credit score. If not in use, consider keeping it open with no balance instead.

Request a Credit Limit Reduction Instead of cancelling the Card

To limit spending without affecting your CIBIL score, request a credit limit reduction instead of cancelling the card. This reduces your available credit while preserving your credit history and mix.

Choose the Right Time to Cancel Your Credit Card

If you are planning to apply for a loan or a new credit card, its best to wait until after your application is approved before cancelling your existing card. Closing it too soon may lower your credit score and negatively impact your loan approval or terms.

Monitor Your CIBIL Score

After you cancel your credit card, its important to monitor your CIBIL score to ensure that its not negatively impacted. Use services that offer free access to your credit score or purchase a report from CIBIL. Regular monitoring helps you stay on top of your credit situation.

Conclusion

Cancelling a credit card wont harm your CIBIL score if done right. Pay off all balances, manage your credit utilisation, and avoid cancelling cards that affect your credit history length. By taking the right steps, you can maintain a good credit score while cancelling your credit card.