Does Closing a Loan Early or Credit Card Hurt Your Credit Score?

It always feels good to clear a loan or pay off your credit card, especially if you do it ahead of time. For any business owner, having less debt means less stress and more money for other important things. But you may have heard that closing a loan or credit card early could actually lower your credit score. Is that true? 

The answer is: it depends. Being debt-free is great for your finances, but the way your credit score is calculated means some steps, like shutting down a loan or credit card, can cause small changes you might not expect. 

Let’s break down how paying off and closing a loan or credit card early can affect your credit score, what you should watch out for, and easy ways to keep your credit score healthy as a business owner. 

What Goes into Your Credit Score? 

Your credit score is basically your financial report card, a number between 300 and 900 that tells lenders how trustworthy you are when it comes to handling debt. In India, this score is tracked by companies like CIBIL or CRIF. 

Here’s what matters most: 

1. Paying Your Bills on Time: If you pay your EMIs and credit card bills when they’re due, your score goes up. Missed or late payments can really hurt. 
2. How Much Credit You Use: If your credit card limit is ₹2,00,000 and you regularly use ₹50,000, you’re using 25%. Lenders like it when you keep this below about 30%. 
3. Your Credit History: The longer you’ve been using credit or loans, the better. 
4. Mix of Credit: Having a combination of loan types, like one business loan and a couple of credit cards, is seen as positive. 
5. Applying for New Credit: Every time you apply for a new loan or card, it gets recorded. Too many applications too quickly can make you look desperate for credit and may lower your score a little. 

Now, how does closing an account early affect these points? Let’s see. 

What Happens If You Close a Loan Early? 

Paying off a business loan, vehicle loan, or any other kind of term loan before time shows you’re managing your money well. Here’s what to expect: 

Why It’s Good: 

• You Save Interest: Less time paying EMIs means less interest overall. 
• Less Debt Makes You Look Stronger: The less you owe, the healthier you look to lenders if you need another loan in the future. 
• Better Cash Flow: No more monthly payments, so you can use that money elsewhere. 

Possible Downsides: 

• A Minor Impact on Your Credit Mix: If you only had one loan and now it’s gone, your mix of credit types gets smaller. This matters a little, but not much. 
• Shorter Account History: Paying off the loan closes the credit account, so the history eventually “ages off” your credit report. 

Bottom Line: For loans, clearing them early is almost always a smart move. The positives far outweigh any minor impact on your score. 

What Happens If You Close a Credit Card? 

Credit cards are a bit trickier. Closing a card can have a real effect on your credit score, not always for the better.

It Can Raise Your Credit Usage

When you close a card, you lose that card’s limit. So, the percentage of credit you’re using out of your total limit suddenly goes up. 

Example: 

Let’s say you have: 

• Card A: ₹1,00,000 limit, balance of ₹30,000
• Card B: ₹50,000 limit, balance of ₹0 

Your total limit is ₹1,50,000, but you only owe ₹30,000.
You’re using 20% of your available credit. 

If you close Card B, your new limit is ₹1,00,000. Now, you’re using 30% without spending anything extra. If you cross that 30% mark, your score can dip.

It Can Shorten Your Credit History

If your oldest card is closed, over time, your credit history will look “shorter” to lenders. Long, stable credit histories are a big help to your score. 

When Does It Make Sense to Close a Card? 

• If it has a high annual fee and you’re not getting any benefit from it 
• If you’re tempted to overspend and need fewer cards to stay disciplined 

When Should You Keep It? 

• If it’s your oldest account (helps keep your credit “age” long) 
• If it has a high limit that helps keep your usage percentage low (just use it sometimes for a small bill and pay it off) 

Bottom Line: Don’t rush to close a credit card unless you really need to. If you have to close one, pick a newer card or one with a low limit, not your oldest or largest. 

Tips for Keeping a Healthy Credit Score 

Here are some simple steps all business owners can follow to keep their credit scores looking good: 

1. Always Pay on Time: Set reminders, use auto-debit; whatever it takes. 
2. Use Only What You Need: Try not to use more than 30% of your total card limits. 
3. Keep Old Cards Open: Unless they’re costing you money, it’s good to keep your oldest cards active. 
4. Check Your Credit Report: Look at it once in a while to make sure there are no mistakes. 
5. Apply for Credit Only When Needed: Too many loan or card applications in a short time can lower your score. 

How TallyCapital Can Help You 

Managing your credit doesn’t have to be confusing or hard. TallyCapital offers useful, easy tools for business owners: 

• Free Credit Score Check: You can check your business credit score with TallyCapital, totally free, and it won’t affect your score. 
• Quick Business Loan Check: Want to know if you qualify for a business loan? TallyCapital can help you check your eligibility fast using your business data in TallyPrime and connect you to trusted lenders. 

By using these features, you can stay on top of your business finances and protect your credit health. 

Simple Takeaways 

• Closing a loan early is good for you and your business and barely affects your credit score. 

• Closing a credit card, especially your oldest or one with a high limit, can raise your credit usage and shorten your credit history, which could hurt your score. 

• The best plan? Pay on time, use credit carefully, check your score regularly, and keep old credit lines open unless there’s a good reason to close them. 

Good credit habits pay off. With a little planning and by using tools like TallyCapital, you can keep your credit score strong and your business ready for every new opportunity.