What happens to your credit score if you close an unused credit card

Mint

2 days ago

Banks evaluate the rewards program for their existing credit cards regularly. They also keep launching new credit cards regularly based on the evolving customer preferences. So, a change in the rewards program on your existing credit card or the introduction of a new credit card may make you wonder whether you should close an existing credit card and/or apply for a new credit card.
In this article, we will look at some of the reasons why people close their old/unused credit cards and their impact on the credit score.
There are various reasons why people close their credit cards. In the last few years, there has been a steady shift in why customers close their credit cards. The decision is no longer just about dissatisfaction. It's about economics, evolving benefits, better alternatives, etc. Some of the reasons why people close their old/unused credit cards include the following.
High annual fees: Some banks give some of their credit cards as first-year free (FYF). In the case of some banks, they charge the first-year fee. But, in return, they provide adequate welcome benefits that compensate the cardholder for the fee paid. Some banks charge the first-year fee. However, the joining fee is reversed if the cardholder spends a specified amount in the first 90 days or so of card issuance.
In all the above scenarios, the cardholder gets a chance to use the features and benefits of the card in the first year without feeling the impact of the joining fee. The bank levies the annual or renewal fee from the 2nd year onwards.
Most banks link the reversal of the annual or renewal fee with the spending in the previous card anniversary year. If the cardholder is not able to achieve those spends, they have to pay the annual or renewal fee. Customers holding multiple cards for different types of spending often miss the milestone spends for the annual fee waiver. If the annual fee is high and there are no or inadequate renewal benefits, the cardholder opts to close the credit card.
Rewards program devaluation: When a new credit card is launched, the bank usually offers a higher reward rate to attract new customers. Once the bank achieves a specific number of cardholders or market share, it re-evaluates the rewards program.
Some of the changes they may make can include: A reduction in the reward points for every Rs. 100 spent for all categories or specific categories, exclusion of specific categories from earning reward points, capping on monthly reward points that can be earned, reduction in the redemption value per reward point, reduction in the ratio for transfer of reward points to partners, etc.
If the rewards program is massively devalued in one or multiple categories as mentioned above, there may be little to no case left for continuing with the card. In such a scenario, the customer may close the credit card before renewal.
For example, in September 2023, the Axis Bank Magnus Credit Card saw a devaluation in its rewards program. Some of these devaluations include discontinuation of the monthly milestone benefit of 25,000 EDGE Reward Points on Rs. 1 lakh monthly spends, downward revision in the transfer ratio from 5:4 to 5:2 for transfer of EDGE Reward Points to various airline and hotel partners.
Some features have been reduced or withdrawn: Many credit cards offer various features and benefits like a specific percentage discount on a specific merchant/category, BOGO offer on movies, complimentary airport/railway lounge access, complimentary golf access, airport meet and greet service, complimentary annual memberships (Amazon Prime, Swiggy One, etc.), etc.
While these features and benefits add value to the customer, they come at a cost to the bank. From time to time, banks review the features and benefits offered on the cards. The bank may reduce or remove one or more benefits to make the program sustainable so that it can be offered for the long term. What if the customer has taken a credit card specifically for a particular benefit, and that benefit has been substantially reduced or taken away completely? There is no case to continue with the card.
Loss of key features plays a role in card closure. Complimentary airport lounge access, for example, became a marquee benefit a few years back. Over the last couple of years, most banks have either linked complimentary airport lounge access to monthly/quarterly spends, reduced the number of complimentary lounge accesses, or discontinued it. Such changes prompt customers to rethink whether the card is worth keeping.
For example, effective 15th July 2025, the EazyDiner Credit Card saw a major devaluation in the features and benefits. Some of these devaluations included a capping of Rs. 2,000 on the monthly discount, discontinuation of complimentary airport lounge access, discontinuation of the BOGO offer on movie tickets, etc.
The credit limit is low: There can be a difference between the proposed and actual limit given on a credit card. When the customer avails of a pre-approved credit card offer and gets a lower credit limit than expected, it is disappointing. In such a case, the customer may not activate the card at all. As per RBI rules, if the card is not activated within 37 days of issuance, it must be closed automatically.
'At ZET Partner, which is our B2B2C distribution business, we see roughly 5–8% of customers closing cards simply because they are unhappy with the credit limit,' said Manish Shara, Co-founder and CEO, ZET. ZET is on a mission to help 400 million unserved and underserved Indians build their credit score and enhance their financial health.
Sometimes, the bank reduces the credit limit on existing credit cards for its customers. For example, if the bank perceives a difficult macro situation, it may reduce the credit limit for several credit card customers as a precautionary measure. At times, if the bank systems flag risks due to a strange behaviour by an individual credit cardholder, the bank may reduce the credit limit for that particular cardholder.
Better cards are available: From time to time, banks introduce new credit cards with better features and benefits compared to existing ones in the market. In such a scenario, the customers may apply for the new credit cards to enjoy better features and benefits. It leaves existing cards unused, leading to their closure.
In the earlier section, we understood some of the reasons why customers close their credit cards. Let us now look at the impact of credit card closure on the credit score.
Increase in the credit utilisation ratio: The credit utilisation ratio measures the percentage of the credit limit being used from the total credit limit available. For example, a cardholder has a credit limit of Rs. 10 lakhs across all credit cards and spends Rs. 2 lakhs/month with them. In this case, the credit utilisation ratio of the cardholder is 20%.
When you close a credit card(s) and maintain the same monthly spending, your credit utilisation ratio will increase. Continuing our earlier example, suppose the cardholder closes two credit cards with a total credit limit of Rs. 5 lakhs. The cardholder will be left with a credit limit of Rs. 5 lakhs across the remaining credit cards. If the cardholder continues spending Rs. 2 lakhs/month, the credit utilisation ratio will increase to 40% from the earlier 20%.
Credit Information Companies (CICs) like CRIF High Mark use the credit utilisation ratio as one of the parameters for calculating the credit score. A credit utilisation ratio of 30% or lower contributes positively towards increasing the credit score. On the other hand, a credit utilisation ratio of more than 30% contributes to decreasing the credit score.
'The impact of closing a credit card depends largely on the credit utilisation ratio. After credit card closure, if your overall utilisation ratio crosses around 40%, the effect starts turning negative. At a 50–75% credit utilisation ratio, your score can drop by 20–50 points. Between a 75–90% credit utilisation ratio, the drop in credit score may be 50–75 points. Above a 90% credit utilisation ratio, you could lose more than 75 points almost immediately,' adds Manish Shara.
Reduces the length of the credit history: When you close an old credit card, it reduces the length of your credit history. Credit age is one of the parameters that goes into calculating the credit score. A higher credit age contributes positively to increasing the credit score. On the other hand, the closure of an old credit card contributes to decreasing the credit score.
'Closing your oldest card can shorten your credit history, which influences how lenders view your stability. While it may be sensible to close newer unused cards, it is rarely wise to close your longest-held account,' adds Manish Shara.
We have discussed how closing an old credit card can increase your credit utilisation ratio and reduce the length of your credit history. Both, these factors impact your credit score negatively. So, what can you do instead? You can request the bank to make the credit card lifetime free instead of closing it. Once the card becomes a lifetime free card, you need not worry about closing it. All you need to do is do a small transaction every few months to keep the card active.
Also, if you have to close an old credit card, there will be a short-term impact on your credit score. However, when you continue making regular, timely bill payments and maintain a credit utilisation ratio at 30% or lower, the credit score will recover in the next few months.
'The takeaway is simple: the decision to close a card should be strategic, not emotional. We advise customers to weigh the benefits lost against the potential impact on their credit profile. We tell them to always consider how it affects both utilisation and credit age, before taking the final call,' concludes Manish Shara.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
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