Everything to Know before You Cancel a Credit Card
Having a credit card makes your life extremely easier and is one of the convenient ways to go cashless. However, if you keep finding yourself in a debt trap, you can consider cancelling or closing the card to avoid overspending.
But before opting for a credit card cancellation, it is crucial to consider how the cancellation will affect your credit score. You will also want to consider if the demerits of cancellation are worth it. This blog speaks about the factors that you should know before cancelling a credit card.
6 Things to Know Before You Cancel a Credit Card
Cancelling a credit card can lead to several consequences like an increase in your credit utilisation ratio and a drop in your credit score. Before deciding to close your credit card, there are certain important factors that you need to keep in mind.
- Outstanding Balance
Before closing or cancelling your credit card always ensure that your credit card account does not have any outstanding balance. It is not possible to raise an application with pending charges.
If you are facing any financial issues and are unable to repay the amount, it will attract interest and late payment penalties. In such a scenario you can transfer it to a different credit card or may opt for a personal loan to pay off all of your debts.
Additionally, you must also clear all your payments of online subscriptions, utility bills payments or EMIs.
- Benefits Left to Redeem
Credit cards usually come with various reward points, which you can redeem for shopping, travelling, etc. Additionally, you can also enjoy lucrative cashback, coupons, and discounts, while purchasing various products or services through your bank’s marketing partners.
If you close your credit card, you will lose access to all these benefits and offers. Therefore before cancelling your credit card, always verify the number of reward points your card has earned over time. If you have accumulated a lot of reward points, go to the rewards catalogue and redeem as many as you can.
- Auto-Payments to Turn off
Auto payment charges seem convenient. Majority of the credit card users turn on the auto payment feature as they do not have to worry about manual payment action. But before cancelling a credit card it is essential to call off all your auto-payments.
All you need to do this is log in to your bank’s website and cancel all your subscriptions, utility bills, etc. If you eventually fail to do so, it will attract hefty penalty charges.
- Avoid Closing If Planning for Something Big
People use different types of credit cards depending on their financial capabilities. Financial institutions provide you with a credit card after verifying your creditworthiness. Therefore, Using a credit card signifies that you have been a responsible borrower throughout the time, contributing to your credit score.
If you are going to take a home loan or education loan, it is advisable to avoid cancelling your credit card.
- Close the Newer Credit Card First
When closing credit cards, it is imperative to consider each card’s age. It is because it has a significant impact on your credit card. The older an account is, the higher is its contribution to your credit score.
An old credit card shows that you have been responsible as a borrower and creditworthy as you have paid all your dues on time. So if you lose or cancel your older credit card, your credit history can be reduced, which may slightly affect your credit score.
On the other hand, if you cancel a newer credit card, it may not significantly affect your credit score. So if you have multiple credit cards, try to close the newer ones first.
- The Impact on Your Credit Report
Before closing the card, always examine your credit report as it can result in a loss in your credit score and your credit utilisation ratio (CUR) will increase. Utilising your entire credit limit can drop your credit score as lenders would think that you have trouble managing your finances.
Let’s consider an example for a brief understanding. If you have two separate credit cards with separate spending limitations of ₹2 lakh. Suppose you have spent ₹1 lakh of your entire credit limit every month on the usage of each card for ₹50,000.
If you close 1 card with a charge ₹1 lakh on the single card your credit utilisation ratio will increase by 50%, lowering your credit score. Therefore, it is essential to keep an eye on your credit report.
Also after receiving the final confirmation about the cancellation of a credit card, you should check whether it is finally removed.
Applying to close your credit card is a simple process. However, it is advisable to consider the consequences first before contacting your lender to close your card account. Unless absolutely necessary, you should try to avoid cancelling credit cards. If you are unable to pay all your debts, you can try alternative ways such as negotiating a lower interest rate, reducing the card limit, and so on.
Frequently Asked Questions
Do unused credit card cards close automatically?
Typically, most financial institutions or card issuers do not automatically close a credit card, if you have not used it for a longer period. However, annual fees and other charges are still applicable on unused cards. So it is advisable to use your credit card responsibly and regularly to reap the numerous benefits that come with it. Recently the RBI came with a circular that if a credit card is not used for more than a year, banks should close the card with prior communication to the customer.
Should I have multiple credit cards?
Having more than one credit card can eventually boost your credit score. Also, you become eligible for a higher credit limit and can enjoy a longer interest-free period with more reward points. However, there are several disadvantages to using multiple credit cards such as difficulty to manage, increased debt risk, and more.
Does cancelling a credit card affect your credit score?
Yes, closing a credit card can affect your credit score. If you close your credit card, it affects your credit history, credit utilisation ratio and credit limit. However, if you consider cancelling a credit card it is necessary to consider different aspects that may not affect your credit score.
How can I use my credit card?
You can use a credit card to make several transactions like paying taxes, paying rent, buying electronics, online purchases, making travel expenses, and many more. Using your credit card effectively involves keeping a track of your spending, regularly checking credit card statements, using free rewards and offers and setting an appropriate limit.