Imagine you are a credit card holder who owns more than 2 credit cards but use only 1 for most of your purchases. A situation now arises where you no longer find the operation of multiple credit cards as viable and hence want to close all your credit cards. So you approach the bank or credit issuing authority and ask them to close all your credit cards at once. The problem here is that banks or credit issuing companies maintain their own credit card cancellation or exit policies. In such a situation it helps to know what steps to take when closing a credit card.
A credit card allows you to borrow money from a bank or credit card issuing company to make purchases either online or at a POS terminal. You make these purchases on credit from the bank or credit card issuer. You can spend using the credit card only up to a credit limit. You receive a credit card bill statement at the end of a credit cycle which is usually between 25-30 days. The statement gives a detailed view of your transactions on the card and the amount you now owe to the bank or credit card issuer. If you fail to pay the amount within the stipulated payment due date, then you are levied with a penalty. You are approved of a credit card based on your income and credit bureau report.
When choosing to apply for a new credit card, ask yourself if you are really capable of making the monthly payments on time. Be wise in knowing how much out of your income you need to keep aside for monthly expenses and how much out of that would go towards your credit card payments. If you can afford it, then only think of applying for a new credit card. Credit card usage and timely bill payments help you to receive rewards points. Proper usage of credit card depends on your self-discipline. Always try to keep some funds aside towards credit card bill payment. Start with 1 credit card and then if you really need to, apply for multiple ones. Don’t fall for the temptation of credit card offers and end up owning multiple credit cards. You can increase your credit limit if you have been a responsible credit card user and have the right income
Credit card features
Tracking for budgetary control – Credit card statements received each month can be used to track what purchases you have done and reduce upon the unnecessary.
Emergency spend – An advantage of credit card is that you are always covered in case of emergencies. Use it for that one big expense but remember, pay it off on time.
Convenience while travelling – It is easier to move around without a wallet when you pay with a credit card, or withdraw money from an ATM. Keep in mind the charges involved.
Positive credit score – You can build a positive credit score by being a responsible credit card user. Timely payments build your repayment history which is seen positively by the credit bureau.
Close your credit card wisely
If you own multiple credit cards then it is wise not to close all of them at once. Closing too many credit cards at once can reflect badly on your credit score. You might want to consider downsizing the number of credit cards. The reason to close the card could be either because the card issuer has changed the terms on the card or you just not happy with the charges you have to bear or the service in responding to complaints etc.
Closing a credit card can hurt your credit score, particularly if the credit card makes up a significant part of your credit history. Remember to pay off the balance first. This will lead to an increase in your credit bureau score. Also remember to cancel any automatic payments or subscriptions which you have enabled through your credit card. These payments will get reversed and lead to penalties from the card issuer. If you don’t know what automatic payments are going out, go through your credit card statement.
Also, utilize any rewards that you may still have on the credit card. Once the card is closed, you will have to forfeit the unused rewards. Cards with high annual fees are a good reason to close the credit card. If the card issuer is unwilling to waive off the annual fee, then it makes sense to close the credit card. Opting for a second credit card is also a good reason to close your primary credit card. After taking advantage of a good credit limit attached, you can close the first/primary credit card.
In the future though, if you want to apply for a personal loan at a bank or digital lending platform, your credit bureau score will indicate the closure of a credit card. Banks or digital lenders are interested in what was your credit utilization ratio which is the amount of credit you used earlier to the amount that was available to you. So closing a credit card might not give your prospective lenders a clear picture of your past credit utilization ratio.
Steps to close a credit card
- Contact the bank
Once you have decided to close the credit card or which of the multiple cards you want to close, contact the bank or credit card issuing company with a card cancellation request. Call their customer care number and follow up with a written communication either by email or application. The written communications not only helps the issuer to cross check and verify the authenticity of your card cancellation request but gives you a proof in case of any future disputes.
- Don’t keep any balance pending
The issuer will cancel a credit card only if there is no pending balance due to them. The customer care executive will update you in case any balance is pending including any interest fee or levied charges. The payment of the balance can be either done in lump sum or via installments as per your convenience. Paying in installments will still accrue interest on the balance amount. If you are requesting a closure of credit card after the billing date, then this may result in some residual balance not reflecting in your card statement. Pay off this pending amount and keep the payment proof in case for disputes in the future.
- Follow up on cancellation
Most credit card issuers will not let you go easily. The competition prevailing in the credit card segment means you are a source for financial revenue to them. You will be asked to withdraw your cancellation request and offered a reduction in interest to keep you happy. Stick to your request and insist on getting a written acknowledgement once the cancellation is done. You have to then destroy the credit card by cutting the card across the magnetic strip.
- Check your credit bureau report
Once you have closed the credit card, you now have a reduction in credit limit. This will get reflected on your credit bureau report. Keep an eye out for the effect your closure does on the report.