Cancelling a Credit Card Can Affect Your Credit Score and Loan Eligibility

Many people choose to cancel their credit cards to avoid unnecessary debt or reduce spending. While this may seem like a smart financial decision, closing a credit card can have unexpected consequences that may affect your credit profile and future borrowing capacity.

One of the biggest impacts is the reduction in your total available credit limit. When a credit card is closed, the credit limit attached to that card is removed immediately. As a result, your overall borrowing capacity decreases even if your spending habits remain the same.

For example, if you have a total credit limit of Rs 1 lakh and cancel a card with a Rs 50000 limit, your available credit instantly drops. If your monthly spending remains unchanged, your credit utilization ratio increases significantly.

A higher credit utilization ratio is viewed negatively by banks and financial institutions. Financial experts generally recommend keeping this ratio below 30 percent. If it rises above that level, lenders may consider you a higher risk borrower, which could affect your chances of getting future loans or additional credit.

Another important factor is your credit history. Banks and lenders often value long standing credit accounts that have been maintained responsibly over many years. Closing an old credit card can shorten your credit history, which may reduce the strength of your overall credit profile.

Financial institutions evaluate both your repayment record and the length of your credit history before approving loans. A well maintained credit card account demonstrates responsible financial behaviour and can improve your credibility with lenders.

Before deciding to cancel a credit card, it is important to assess how the move could affect your credit score and borrowing ability. If the card has no significant annual fee and has been maintained responsibly for years, keeping it active may offer long term financial benefits.