In today's fast-paced and consumer-driven world, credit cards have become a ubiquitous financial tool. They offer convenience, rewards, and a sense of security during emergencies. However, some individuals might find themselves overwhelmed with credit card debt or tempted to overspend, leading them to consider the radical step of ditching their credit cards altogether. While cancelling credit cards can provide a sense of relief, it can also have significant implications on your credit score, especially if it is an older credit account. This article explores the consequences of giving up credit cards and provides insights on how to maintain a healthy credit score.
Understanding credit score
Before delving into the consequences of ditching credit cards, let us quickly grasp the concept of a credit score. A credit score, such as the CIBIL Score, is a numerical representation of an individual's creditworthiness. It is a critical factor that lenders use to assess the risk associated with providing credit to a borrower. Your CIBIL Score is a three-digit number between 300 and 900, with 750 or higher considered an ideal score by lenders. The higher your score, the easier the approval process and higher the chances of obtaining favourable interest rates.
Role of credit cards in building credit history
Credit cards play a crucial role in establishing and building your credit history. When you use a credit card responsibly, i.e., making timely payments and maintaining a low credit utilisation ratio, it reflects positively on your credit report. A good credit history is a fundamental factor in determining a high credit score.
Impact of closing credit card accounts
One of the primary reasons individuals consider ditching credit cards is to avoid the temptation of spending beyond their means. While this step might help control spending habits, it can have a mixed impact on your credit score.
Shortened credit history: If you decide to close an old and well-maintained credit card account, it could negatively affect your credit score. This is because the length of your credit history plays a role in determining your creditworthiness. Longer credit history suggests a more extended period of responsible credit management, which is viewed positively by credit bureaus.
Increased credit utilisation ratio: The credit utilisation ratio is the percentage of your credit limit that you are currently using. When you close a credit card account, your total available credit decreases, which might lead to a higher utilisation ratio if you carry balances on other cards. A high credit utilisation ratio can negatively impact your credit score.
Potential benefits of ditching credit cards
While closing credit card accounts can have some adverse effects on your credit score, there are potential benefits that might make this decision worthwhile for certain individuals.
Reduced risk of debt accumulation: Without credit cards, you eliminate the risk of accumulating high-interest debt. By solely using your available funds, you can avoid falling into the debt trap and improve your overall financial well-being.
Enhanced financial discipline: When you rely solely on cash or debit cards for purchases, you become more conscious of your spending. This might lead to improved financial discipline and better money management habits.
Strategies to offset negative impacts
If you are determined to ditch credit cards but concerned about its potential impact on your credit score, there are strategies you can adopt to mitigate the effects.
Keep old accounts open: Instead of closing old credit card accounts, consider keeping them open even if you do not use them frequently. This way, you can maintain a longer credit history and reduce the credit utilisation ratio.
Pay bills on time: Timely payment of dues can help you maintain a positive credit history and offset the impact of closing credit card accounts.
Building a good credit score is essential for financial stability and access to credit when you need it. If you are concerned about the impact of ditching credit cards on your credit score, consider using the Bajaj Finserv Credit Pass. It offers a personalised dashboard to track all your credit accounts in one place and real-time insights into your credit health. Use the monthly CIBIL Score updates and the interactive tools to help you improve your credit score systematically.
Deciding to ditch credit cards is a personal choice that should align with your financial goals and spending habits. While it may have some impact on your credit score, you can adopt strategies to minimise the negative effects. Remember, responsible financial behaviour and timely bill payments are crucial for maintaining a healthy credit score. If you need assistance in building or improving your credit score, sign up for the Bajaj Finserv Credit Pass today and enjoy unlimited access to all its benefits for free for a full year.
