Closing your credit card account can have some unintended consequences. Here is what you need to know and do before doing that.
A credit card is one of the most common methods of payment in the digital world we live in. This card enables you to pay for all kinds of purchases offline as well as online. It provides, within limits, interest-free credit assuming you settle your card dues in the same billing cycle. You also get rewards, discounts, and deals through your card.
Due to these conveniences, many people own multiple credit cards from various banks. This allows them to access a range of benefits along with a higher, overall spending limit. Owning multiple cards, however, can be challenging for some people, and hence they may look to own fewer cards. Sure, you should close any account you find inconvenient to your finances. But for that, there’s a process you need to follow, and you must also account for the consequences of closing a credit card.
Let’s look at the consequences, and also what you need to do while closing your credit card account.
1. Your Credit Utilisation Ratio Will Increase
The first consequence of being one credit card short: your Credit Utilisation Ratio (CUR) will increase. Your CUR is the percentage of available credit you’re spending. A high CUR harms your credit score, which increases the interest rates you pay on your loans. Let’s understand this better. Let’s say you have two cards with spending limits of Rs 1 lakh each, giving you a total limit of Rs 2 lakh. You spend Rs 25,000 per card each month, which means you’re spending a total of Rs 50,000 out of Rs 2 lakh, or 25% of your total limit. Now, let’s say you closed one card, and spent Rs 50,000 on the remaining card. This would push up your CUR to 50%, which should ideally be in the 20-30% range. Hence, closing the card means a higher CUR. This can be rectified by either spending less on the existing card, or asking the bank to increase your spending limit—something that will happen only at the bank’s discretion.
2. Your Credit Account Ages Will Fall
This is the second consequence, which can also impact your credit score. The age of your credit account has a major impact in the computation of your credit score. The older your account, the higher its contribution to your score. An old credit line reveals that you’ve been a responsible borrower through that period and are therefore creditworthy, which means having a higher credit score and being eligible for the best loan and credit card offers. Hence, you should carefully think about the repercussions of closing a credit card you’ve owned for many years. Losing an old credit account may marginally reduce your credit score. Losing a recent credit card on the other hand may not have a major impact on your credit score. If there are issues with your credit card, such as a high annual fee, or a low spending limit that’s bothering you, speak to your bank for a solution rather than closing the account outright.
3. Redeem Your Pending Reward Points
Now, assuming you’ve made up your mind to close your credit card account, let’s start the process. Among the many advantages a credit card offers are its reward points which can be redeemed for cashback, discounts, coupons, products or services through your bank’s marketing partners. Many a times, people do not pay attention to how many reward points they’ve accumulated through years of usage. So before you dump your card, ensure you have redeemed your points. You can visit the bank website and rewards catalogue to choose the products or services to purchase in exchange for your reward points.
4. Pay Off All Dues
Next, ensure there are no dues on your credit card account. You cannot close a credit card account with pending charges. These pending charges will also attract interest and late payment penalties. If you’re transferring your card balance to a new card because you don’t have the liquidity to pay your dues, connect your current bank with your new bank to facilitate the transfer as per their mandated process.
5. Ensure There Are No Standing Instructions On The Card
A standing order mandate is when you as a cardholder have instructed your bank to make regular payments from your account. These payments may be online subscriptions, EMIs, or even utility bill payments. All these instructions need to be cancelled. You don’t want new charges against your card while you’re trying to clear your dues to close the account. So ensure that those standing instructions are cancelled and ideally wait for a month to ensure cancellation.
6. Contact Your Bank To Initiate The Process
Once you are sure that all your dues are paid off, the reward points are redeemed and there are no standing mandates on your credit card you wish to close, you can then contact your bank to initiate the process of closing the account. You will be required to notify your bank about the account closure for them to initiate the same. This can be done by email, phone a visit to the branch, or by any other means established by your bank. It is advised that all the previous steps involved are done before you notify the bank and if there are any other requirements for the same, it can be done more efficiently and effectively.
7. Follow Up To Ensure That The Account Has Been Closed
Banks and their personnel have many functions which they perform at one time, hence your request to cancel your credit card may not be carried out in real-time. However, as a responsible cardholder, you should always follow up on your request and make sure that the credit card has been cancelled by the bank so that no transactions are being carried out with the card. Do not settle for their verbal assurances. Ensure you collect your no-dues certificate from the bank as well as a written confirmation of the account closure. This will ensure there are no complications, controversies, and disputes later.
These are some of the steps involved in closing your credit card account. It is advised that you contact your bank for more a more detailed process on the process of closing your card account and its effect on your credit score. Just to be sure, check your credit score online about three months after the account closure to assess its impact.
(The writer is CEO, BankBazaar.com)