Getting a credit card today can be as easy as ordering food. If we have an existing relationship with a bank, chances are we have received a call from them at some point telling us that we have been pre-approved for a card, and since they already have our financial and personal information, we don’t have to do anything except sign the application and receive the package containing the new card.
The challenge isn’t in getting a new credit card anymore, but in managing finances with multiple cards. Do you feel like you have too many cards and are looking to own fewer? Simply cutting the card into two isn’t the solution here. There’s a process that needs to be followed and certain consequences that need to be faced. You need to know whether closing a credit card account is in your financial interest.
Here are a few things you should accomplish before you close your credit card account.
Redeem Your Reward Points
If you have accumulated reward points on your credit card, consider redeeming them before closing your account. Reward points are non-transferrable, meaning, you cannot transfer your points to another person, or even another card with the same bank. Once the account is closed, you forfeit unclaimed points. There may be several ways to redeem your points. Refer to the terms and conditions associated with redeeming the rewards points you’ve earned through eligible card spends. You will also be well-advised to go through your card’s rewards catalogue. You could redeem for merchandise, gift vouchers, discounts, cash, or even air miles, depending on the kind of card you have.
Ensure There Are No Standing Instructions
If you have an auto-debit facility set up to pay your recurring bills, ensure you cancel them before closing your account. This will help you set up standing instructions with another card account, otherwise, you would cut off the payment source for your recurring bills without an alternate. Also ensure you prepay any pending EMIs (equated monthly instalments) as they attract heavy penalties. Note that most banks charge a prepayment fee for closing instalment plans early.
Pay Off All Dues In Full
Before closing your account, make sure your outstanding balance is paid in full. If you don’t do this, your account could become ‘delinquent’, which can have terrible consequences towards your credit health. Failing to pay your dues in full for 90 days or more, it will become delinquent, and your credit score will take a hit.
When you close your account, you want your credit report to reflect the account as ‘Closed’ and not ‘Settled’ or ‘Written Off’. What do these terms mean?
‘Closed’ means that you have paid all your dues and have closed the account. ‘Settled’ means you have partially paid the dues and the bank has decided to waive the rest. ‘Written Off’ means that you have not cleared your dues for 180 days and the lender has written off your debt. Only the first option works in your interests.
A settled or written off account does not look good on your credit report because in both cases the lender faced a loss. This will impact your credit score negatively and dampen your chances of loan approvals in the future. However, in most cases, your issuer will contact you about the dues before it comes to such a situation, so be sure to pay the full due amount before closing your account.
Initiate Closure With The Bank
Most banks require you to notify them of account closure in writing, through email, via phone, or a personal visit to the bank branch. You will have to fill an account closure form and pay any dues associated with the card via cash, cheque, or other means.
Take No Dues Certificate
Once you submit the account closure form and pay any remaining dues, the bank must give you a No Dues Certificate stating that there are no pending charges on your credit card account before closure. You must take it in writing from the bank that your account stands closed. This is important because any pending charges will attract late payment fees and interest charges even if you have closed the account from your end. And it will give the bank the right to collect such dues with additional charges. So, ensure you collect the certificate along with a written confirmation that your account has been closed.
Your CUR Can Increase, Which Is Bad
CUR refers to the Credit Utilisation Ratio. It is the ratio of your used credit against your total available credit, i.e. your total credit debt divided by your total available credit (from all credit lines). For example, you had two credit cards with a spending limit of Rs. 50,000 each. If you spend Rs. 25,000 in a month from both cards, your CUR is 25%. But if you close one card and spend Rs. 50,000 from one card, your CUR hits 100%. CUR is one of the factors that affects your credit score – the higher the CUR, the lower your credit score, because it implies a credit-hungriness on your part. Ideally, you must maintain a CUR of 20-30%.
Upon closing your card account, the total credit available with it will be lost. But if your spending pattern remains the same, your CUR will increase because your total available credit has reduced. So, unless you’re planning to cut down credit card spends, you’re looking at an increased CUR, potentially lowering your credit score.
Your Credit Line Aging Will Fall – Also Bad
The age of your credit lines plays a role in the computation of your credit score. The longer your credit account, the better for you. It reflects positively upon you that you’ve managed to retain your account for several years. This is only possible if you haven’t defaulted and have been paying your dues. When you close a credit card, you will lose the aging history that the card provides. Therefore, your payment history will be shortened to the extent provided by the card you’re closing, and this could hurt your credit score marginally.
Every step of closing your account has a due process and consequences. However, keeping these points in mind will help minimise the impact on your credit score, which is a crucial determinant of any future loan approvals.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for credit cards, loans, credit reports, and more.