A credit card can be a useful tool for someone who wants to spend freely, earn rewards, build credit history and a host of other benefits. But at some time, having too many credit cards can make it difficult to keep track of payments due, due dates and annual maintenance fees.
Does closing an old credit card impact your credit health? Well, it depends on your financial situation, but like most things in life, closing a credit card comes with its pros and cons. While closing a credit card can hurt your credit utilization ratio rate and the average age of your accounts, however in some cases, cancelling a card might make sense.
For example, abandoning a card could be a good idea if you’re trying to maintain your spending to a minimum however if this is the only credit card you have, think twice as a credit card allows flexibility especially during travel and emergencies. Before you rush off to cancel your credit card, here’s what you need to know:
It is essential to consider whether closing that credit card will impact your credit score. If this was the only credit card you had and have also not taken any other loan yet, then closing this credit card will mean the credit bureau doesn’t get updated credit history on you. Gradually, this will lead to you not having any credit score.
Your repayment history, a major factor for your credit score, shows whether you’ve paid on time. If you have a consistent payment history, keeping your account active can retain your account’s good standing. Getting rid of a credit card doesn’t remove it from your credit report, nor does it remove any associated payment history from your credit report. So, if you were hoping you could close your credit card to make the credit bureaus forget that you were late, then you’re out of luck here.
Another key factor in your credit score is your credit utilization ratio, which compares the amount of credit you’re using with how much you have available. When you close a card, you reduce your overall available credit. Unless you also cut back on your spending, this can increase your credit utilization ratio. In general, lenders look for a ratio of 30 percent or less as an indicator that you can manage your debt.
Lastly, it is equally important to consider the age of the credit card because if you close a card that’s been opened for many years and keep cards that you’ve had for only a year or so, a dip in your credit score is likely to happen. Lenders prefer seeing a consistent track record of maintaining a good relationship with creditors.
Before you cancel your credit card, log onto your bank’s website and cancel any automatic bill payments (utility bills) or transfers you have set up to go toward the credit card. If you miss cancelling all auto-payments, the utility company will continue to try to charge your “closed” credit card, which will fail, and therefore you may miss out paying your utility bills on time. The utility company may levy a fee for delayed payment too.
Before deciding to close the credit card, you need to clear the outstanding dues on the card. Without doing this, you cannot raise a request to close the credit card. You can do this the old-fashioned way, which is the best way: pay off the balance in full and calling the card’s customer service department to get specific, detailed instructions about your next steps. If you can’t afford to pay the card off, you also have the option to transfer the balance to another credit card, preferably one with a lower interest rate. You can also take a small personal loan to pay off the card dues, generally, a personal loan will be at a much lower interest rate than revolving money on the card.
Credit cards come with plenty of rewards on travel, shopping or restaurants and much more. When you close your credit card, you are closing the rewards you have earned after keeping your credit records on point. You should always check your rewards balance to see if you can redeem it as a statement credit which reduces your outstanding balance. If you have already paid off the balance, then redeem your rewards before closing the account and have a good time because you have been consistent with your credit behavior.
You should always contact your bank once your balance is updated as zero and let them know that you want to close your credit card. They might convince you to not close it by offering rewards programs and lower interest rates but if you have already decided then make sure you have a steady mind about it. Also, after closing your account double check with the bank to avoid any kind of miscommunication. Don’t just destroy or throw away old cards and expect your accounts to close automatically. In case, you miss doing this, you might end up paying the annual fees associated with the card if the bank had not registered your cancellation request.
Make sure you send a letter in writing to the credit card issuer or bank, requesting that you want to close the credit card to keep a record of the request. The letter must have every detail of the cardholder and the request. Name, address, credit card number, date of issue, date of request and mode of the request are mandatory facts that should be listed down in the letter. Your bank might close the account without you sending the letter, but it is always better to be prepared with written proof when it comes to finances. Once you receive confirmation of the cancellation, you must cut your plastic card into small pieces to avoid any potential fraudulent use.
It may take 4-6 weeks for changes to appear on your credit report. But be sure to check your credit report with any of RBI licensed credit bureaus to ensure that the credit card is completely closed and is reported closed. It might not affect the credit score, but it is better to have the status of your credit account reflect on your report accurately to avoid any future discrepancies. Contact your credit card lender or file a dispute with the credit bureau if your credit card account isn’t reported as closed.
Closing a credit card is not a risky step to take, it just must be taken with caution to avoid a negative effect on your credibility.
(By Kalpana Pandey, MD and CEO, CRIF Highmark)