Closing old accounts may temporarily lower your credit score

Closing old credit accounts can negatively impact your credit score in several ways. Many people may not realize this when considering such a decision. When you close an old credit card or personal loan, you eliminate a record of consistent repayments from your credit history. This history is crucial for lenders when assessing your creditworthiness. Longer credit histories generally lead to higher credit scores. Keeping old accounts open can help improve your overall credit profile. Another important factor is the credit utilization ratio. This ratio represents the amount of credit you use compared to your total available credit. If you close an account, your total available credit decreases. If you do not adjust your spending, this can raise your utilization ratio, which should ideally be 30% or lower. High utilization can make you seem overly reliant on credit, which can affect your future loan terms. It's also worth noting that closing an account can lead to a temporary drop in your credit score. This happens because the average age of your accounts decreases and your utilization ratio may increase. Even closing a well-managed account can signal higher risk to lenders if you have opened multiple new accounts recently. To manage your credit effectively, consider keeping accounts with good repayment histories open. If you must close an account, try to close newer accounts instead of older ones to minimize the impact on your credit score. With new rules from the Reserve Bank of India coming into effect, maintaining a healthy credit history will be even more important for securing favorable loan terms in the future.