On his trip to the mall some years back, Rahul had half-heartedly signed a Credit Card application. He received the card and used it for his purchases, online and offline. But soon he realized his expenses were going beyond his budget because of the ease of paying with a credit card. That made him averse of his card and he just put it away and did not bother about it.
While he was moving his residence a few months back, he carelessly threw it away with the PIN written on the card which was found by somebody and got misused.
Rahul was under the impression that not using the card and putting it away was akin to closing the card. Sadly enough, that is not how it works!
In this article of ours, we bring the right ways of closing a card and the pros and cons of the same.
Credit cards are incredibly convenient in more than one way. But, at the same time, a credit card debt is one of the most expensive debts to have. You would also have to think about joining fee, annual charges and minimum spend conditions that may come along with your card.
There may be more than one reason that would require you to close a card. Some of them being:
You found another card with a lower rate of interest and other charges
You have too many cards
You end up spending way too much on your cards
Better rewards on spends or partnership deals on other cards
Whatever may be your reason for closing your credit card, just throwing it away like Rahul doesn't work. When you decide on closing a card, think of all the consequences and then take an informed decision.
Actions To Be Taken Before Deciding To Close A Credit Card
Read Up On The Terms And Conditions Of Card Issue
When you make the decision to cancel your card, it is good to read up on the terms and conditions associated with the cancellation of the card, if any. Some cards may have a minimal usage period. Also check for the period of annual fee paid, if any. As the issuers do not offer any part refund of the annual fee for your card paid, it may be good to time to cancel at the end of the term of particular term.
Consequences on your Credit Score
Effects on Credit History
When you decide not to use a particular credit card and decide to close it, the decision may make financial sense from your end. However, it is also good to try and analyze the impact of the action on your credit score.
Unlike a loan account which is closed on the payment of last EMI, a credit card is a running account which can go on for as long as you use the card. A long history of good and responsible credit is very helpful to your credit score.
If you have had the card for a sufficient amount of time and had been maintaining positive account and clearing all balances on time, then if you close this card, your credit history will be cut short suddenly. If none of your other credit products have a long enough history, then you could see a drop in your credit score.
On the other hand, do not be under the impression that if you close a card on which you had defaulted and were rolling over credit, will suddenly be erased if you take the decision of closing the card. It is a very valid fact that while your misdeeds continue to get reflected on your credit report for as long as 7 years, your good deeds just go away when you close a credit card.
Effects on Credit Utilisation Ratio
With a credit card, you get a maximum limit for spending, which is called the credit limit. One of the components of a credit score is credit utilization ratio. This is calculated as a proportion of your overall spend to your overall credit limit.
If the card which you are intending to close has a big credit limit, canceling this card will suddenly make your credit utilization ratio go higher, if you are using other credit cards with lower credit limit. A high credit utilization ratio negatively affects your credit score.
Additional Reading: Our top tips to lower your credit utilization ratio
Pay Off Any Outstanding Balances
Do not make the mistake of thinking that by closing your credit card, you can close all your outstanding balances, if any, on the card. All of the balances will have to be cleared till the last pie; only then can you think of closing a credit card.
In cases where you have a huge outstanding balance, you can inform the card issuer of your decision to close that particular card so that you have no more future charges levied on it. Meanwhile, you can aim to clear the existing balances.
If you are being charged a huge rate of interest on this card with balance, you may also consider doing a balance transfer to some other credit card.
Additional Reading: Learn more on how balance transfer can be beneficial to you?
Use Up Your Reward Points
Reward points are a fringe benefit of your card but beneficial, nonetheless. If you decide to close a card, it may be good to use up your reward points before you inform about your decision to the card issuer. Do not simply let them go waste, for you have spent money to earn them.
Inform the Credit Card Issuer
Once you have taken all the above-mentioned actions, call up the Customer Service Number of your credit card issuer and inform them of your decision to close the card. You could also use other methods like email, a written statement or an online request through their site to inform of your decision to close the card.
Once you have communicated your decision, make sure you get a confirmation from their end saying that the issuer has received your request and it is being acted upon. Quite often, you may be asked to retain the card and terms of the card may be revised in your favour. Do make an informed decision at this point if you decide to continue and not cancel.
Few pointers that you should take care of when you close a card
Get the exact date of cancellation of the card.
In the final statement make sure, there are no additional charges, penalties or interest charged on your card.
Get a written confirmation from the issuer that your card has been canceled and there are no outstanding balances on the card.
Make sure to cancel all automatic payments that were linked to this card and make alternative arrangements to pay those.
Bear in mind that with the primary card, any supplementary or add-on cards will also get canceled.