Closing credit card can affect your credit score negatively. It leads to shorter credit life span, higher credit utilisation ratio and reduced credit lifespan. AI-based credit monitoring tools help in curbing high spends, by providing a holistic view of an individual’s credit activities and suggesting actionable insights to take the right steps.
Your credit card is a significant part of your financial profile. A well-connected credit card, when used diligently, unlocks several benefits such as timely rewards and travel miles, facilitating seamless shopping and travel experiences. For the uninitiated, owning one may be a huge financial liability, with uncontrolled spending and missed payment deadlines leading to low credit scores. To boost their credit card score, many consider closing existing credit cards, instead of conducting a root-cause analysis. This could be detrimental to your credit profile, leading to credit imbalance and skewed credit utilisation ratios.
There may be times when giving up your credit card could be the right step in your financial journey. However, you must understand what drives your expenses before making that decision. If you are considering closing a credit card to boost your credit score, this article will help you make a conscious decision. Here, we discuss how closing credit card affect credit score and how AI tools can help you make data-backed decisions related to credit card closures.
How Closing A Credit Card Affects Your Credit Profile?
If you are thinking that your credit card is the root cause of your financial troubles, it is time to reassess your expenses. Although it may seem like closing credit card can boost your dipping credit scores, it is not the case. Here are the several factors that could be affected when credit cards are closed.
Imbalances Your Credit Utilization Ratio
A credit utilisation ratio is the ratio of your available credit limit to the usable credit balance. When you close a credit card, you lose access to the available credit on your account. If you own multiple credit lines, this may increase your credit utilisation ratio, indicating heavy dependence on debts. The amount you owe on your credit accounts is the second-most important factor affecting your credit score, and your credit utilisation factor is integral to it.
Simply put, your credit utilization ratio must be less than 30% for a better credit score, and closing a credit card will only raise this number. Let us understand this concept with the help of the following example.
Card A has ₹10,000 balance and a limit of ₹15000.
Card B has a balance of ₹2000 and a limit of ₹25,000.
To understand your credit utilization ratio, divide your total available credit balances by the total available credit card limits and multiply that number by 100. In this case, when both cards are open, you have utilised ₹12,000 out of a total available credit limit of ₹40,000, leading to a credit utilization of only 30%. Now, if you pay and close Card B, your utilization ratio will be close to 67%, which can affect your credit card score adversely. Hence, it is not a good idea to close off your existing credit card.
Shortens Your Credit Account’s Age
A well-aged credit card builds a long history of credibility. If you have a 10-year-old credit card, it indicates that you have paid your credit card bill without delays for 10 long years, contributing to your sincere efforts and improved credit scores. The length of your credit history accounts for a significant percentage of your credit score. Hence, if you are considering closing a long-held credit card, think again before you do so.
Limited Credit Mix
Owning a mix of different credit types is a boosting factor for your credit score. It accounts for around 10% of your credit score. Your credit profile benefits from having different credit sources like a loan or another credit card. Closing a credit card or completely cutting off your credit resources will limit your credit mix percentage, which can affect your credit score.
How To Leverage AI To Avoid Closing A Credit Card?
AI-based credit monitoring tools have paved the way for modern credit scoring and monitoring. Credit monitoring tools like Oolka make use of AI to help automate payment scheduling, scan reports and provide insightful analysis of the numbers, helping their users make data-backed decisions. Here is how you can make use of AI to manage your credit score, help you understand and balance important factors that affect your credit score, etc.
Real-Time Credit Monitoring
AI-tools are trained to continuously monitor credit reports and scan them for any anomalies. This exercise alerts users about any potential negative changes in their credit transactions or accounts.
Personalized Guidance With Actionable Insights
Machine language systems are trained to go through users’ data and provide actionable insights. These insights, when acted upon, help users to prevent unwanted events like a credit utilisation ratio imbalance.
Reduced Human Bias In Credit Scoring
Machine language and AI evaluated reports are devoid of human intervention. Hence, one can be assured of the integrity of AI based credit scoring systems.
Credit Report Automation
AI can generate consolidated reports after considering credit history, transaction history and credit activity to flag discrepancies and offer insights to further review credit activity.
This helps you to find any notorious transactions that may have been carried out without your knowledge, alerting you to take the necessary steps.
Data Aggregation
AI-based tools can aggregate information from the necessary financial bodies to cross-check and verify the validity of your transactions. This gives you a holistic overview of your credit cards and related transactions.
Conclusion
Closing a credit card may seem like the right choice to make while dealing with a chaotic credit borrowing system. With AI tools, you can clean up your past records by implementing effective steps that can help you curb unnecessary spends. In addition, you can stay ahead of your credit card repayment schedule by setting up automatic payments with the help of AI based tools. Cancelling a credit card may not seem like much in the beginning. However, doing so can affect your credit score adversely, create a dire impact on your utilisation ratio and also cut your long-standing association with your credit card company. AI tools have paved the way for modern financial services by enabling several newcomers to have a holistic view of their credit profile and to use their credit cards mindfully.
FAQs
Will Closing A Credit Card Contribute To Lower Credit Scores?
Although it does affect your credit score, the drop in the score will be temporary. This occurs especially if you have held on to an older credit card or have had a long-standing history with the respective bank.
How Long Before My Credit Recovers After Closing a Card?
If you use your credit card mindfully, there are high chances of your credit score recovering sooner than expected.
Should I close my oldest credit card?
It’s usually best not to, as it shortens your credit history and can lead to a larger score drop
Can I use AI to dispute errors after closing a card?
Many AI apps now offer automated detection and assistance for error reporting and dispute processes.
