In today's time, credit score has become an important criterion of financial stability. People are cautious about maintaining it, but sometimes they unknowingly make such decisions, which can hurt their credit score. One of these is closing old credit card or loan accounts. This decision can prove to be harmful at times, as it affects your credit history and credit score. Let us understand in detail what can be the effects of closing old credit accounts.

Effect on credit history

The length of credit history plays an important role in the calculation of credit scores. When you close an old credit card or loan account, its presence in the credit report gradually ends. This can reduce the duration of your total credit history, which can lead to a drop in your score. Maintaining a long and good credit history helps in getting a loan or credit card in the future.

Effect on Credit Utilization Ratio

Credit Utilization Ratio shows the amount of credit you have used against your total credit limit. According to experts, it is better to keep this ratio below 30%. For example, if your total credit limit is Rs 1,00,000 and you spend up to Rs 30,000, then your ratio will be balanced, but if you close an old credit card and your total limit is reduced to Rs 50,000, then your ratio may increase to 60%, which has a negative impact on the credit score.

Temporary drop in score

Closing old credit accounts often leads to a temporary drop in credit score. If new accounts have been opened recently, it may indicate that the person is financially unstable, which may reduce the confidence of lenders.

Do this to keep the credit score better.

If it is necessary to close a credit card, then first review its utility and charges. Close the old card only after getting a new card so that there is less impact on the credit score. Use the less used card from time to time so that it does not become inactive. Thus, it is important to understand the implications before closing old accounts so that your credit score remains strong.

Disclaimer: This content has been sourced and edited from tv 9. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.