Should you close your credit card if you are not using it? Make note of these 4 factors

Do you own a credit card that you do not use on a regular basis? Should you, in such a case, simply discontinue the card or wait for the right time?

Let us understand how it may impact your profile. It is noteworthy to mention that the decision to close your card depends on an interplay of several factors. When you close a card, your overall credit limit goes down. So, it is important to make note of this.

Another factor that one should consider is that the credit card comes handy during an emergency. It does not harm to keep a credit card without using it so long as the annual fee is not exorbitant.

Additionally, if the card gives discounts, access to airport lounge, special events and exclusive clubs, then also it makes sense to keep the card active rather than closing it.

Credit cards: These are the four key factors to consider

1. Credit score: One of the factors which determine your credit score is your credit utilisation ratio (CUR) which should be kept as low as possible -- ideally 30-40 percent. This is calculated by dividing the credit limit utilised by the overall limit.

For instance, when you have a total credit limit of ₹10 lakh via two cards of ₹5 lakh each, and you have already used ₹4 lakh -- your credit utilisation ratio becomes 40 percent. If you close one of these cards, then this ratio will jump to 80 percent, which may adversely impact your credit score.

2. For the rainy day: Just because you are not using the credit card actively, it does not necessarily mean that you won’t need it any time in future. It is advisable to keep the card active to dig into during an emergency.

3. Annual fees: Some cards have low annual fees whereas others charge heavily. If your inactive card has a low annual fee, you may keep it active, but if the annual fee is quite high, you may decide to close it.

4. Reward points and special benefits: Another key feature to keep the card active is to be able to make the most of the reward points and other features it offers such as access to airport lounge, pass to exclusive events, among others. 

(Note: Using a credit card carries its own set of risks)