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Closing a credit card can be detrimental to good credit score - Case study

  Fri, Feb 10, 2017     written by : CSF-Team
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Rakesh Sharma was feeling on top of the world. After 6 months of careful research and planning he was all set to buy his first SUV. He made sure that nothing goes wrong while he sets on to buy his dream vehicle. He was well aware that the CIBIL score plays a significant role in determining his eligibility for the auto loan. And he did almost everything right to ensure that he had an excellent credit score. Well almost! One small mistake landed him into such a trouble that he could never have imagined.

Rakesh had always been punctual in paying his credit card bills. He carried very low balances and never ever defaulted on any loan payment. He had even checked his credit report to ensure that there are no discrepancies. After all he did not want any problems in loan approval and also wanted to ensure that he gets a reasonable rate.

When Rakesh checked the entire list of credit accounts on his report he saw few credit card accounts which he had applied soon after graduating from college. These cards had a low credit limit, high interest rate and not very attractive rewards. Since he had much better cards now, he thought there was no need to carry the old cards anymore. But did the decision to cancel the old credit cards met his objective of improving his CIBIL score or did they result in something that was not expected by him. Actually it caused more harm than good. His credit score got affected negatively.

The length of the credit history and credit utilization ratio play a significant role in determining one's credit score. That's the reason why it is always good to keep your old accounts active. 15% of your credit score is determined by how long you've been using credit. Closing old credit cards shortened Rakesh's credit track record and made him appear less trustworthy. The ratio of the outstanding balances to the total available credit is influential in credit score calculation. When the old credit cards were closed thee credit limits were no longer factored in this ratio. So Rakesh's debt as a percentage of available credit increased drastically which in turn damaged his score.

Rakesh found it difficult to get approved for the auto loan at the leading banks that had a theoretical approach of evaluating the prospective borrowers. Rakesh did not want his CIBIL score to come in the way of his dreams. He was determined to buy his new SUV now. He searched for car loan with low CIBIL score and that's when he found that not all lenders have a stringent requirement of a good CIBIL score. There were many private and genuine loan providers who looked at the overall profile of the borrower and not just the CIBIL score. Since Rakesh had a good history of on time payments in the past he did not face any problem in securing a car loan for bad credit from these lenders.

Even though there are personal loans for low cibil score to help people during their financial difficulties it is always good to be careful and ensure that one has an excellent credit score. Even if you no longer need a credit card it's a wise decision to keep it open especially if it has a positive payment history. It will not only lower your credit utilization rate but also increase the average age of your accounts. Both these factors will help in boosting your credit score.