Closing your credit card? Here’s how to ensure smooth exit

Credit card is a common and useful tool these days and there are multiple advantages of using one. But if you are not able to use a credit card prudently, you might face trouble. Many people often take a credit card and want to close it after some days. If you are going to close a credit card, you have to keep a few points in mind. Else, you might have a tough time after closing the card. Money9 gives you a brief description of the top seven to-do things before closing a credit card to achieve a smooth exit.

Pay off all dues

Ensure there are no dues on your credit card account when you plan to close it. 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, connect your current bank with your new bank to facilitate the transfer as per the due process.

Redeem all reward points

Among the many advantages, a credit card offers are its reward points that can be redeemed for cash back, card payment, discounts, coupons, products or services through your bank’s marketing partners.

Many times, people do not pay attention to how many reward points they’ve accumulated through years of usage. Before you dump your card, ensure you have redeemed all your credit points.

Cancel all standing instructions

Many issue standing instructions against credit cards such as OTT payment, phone bill payment or other utility 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. Therefore, ensure that those standing instructions are cancelled and ideally wait for a month before ensuring cancellation.

Looking for a loan

If one wants to apply for a personal or auto loan, then do not close the credit card. Closing a credit card can affect the credit score. If the score is low, one may have to pay interest at higher rates on the loan.

So, if you have a credit card and a good credit record you might be eligible for a cheaper rate than others.

Credit utilisation ratio

One of the consequences of closing a credit card is that your Credit Utilisation Ratio (CUR) will increase. CUR is the percentage of available credit you’re spending. A high CUR harms your credit score badly. If you have two cards with spending limits of Rs 2 lakh each, you get a total limit of Rs 4 lakh.

If you spend Rs 50,000 per card each month, you’re spending a total of Rs 1 lakh out of Rs 4 lakh, or 25% of your total limit. In case you close one card and spend Rs 1 lakh on the remaining card. Your CUR will be pushed up to 50%, which should ideally be in the 30-35% range. So before closing your credit card account, keep this in your mind and manage your expenses accordingly.

Credit age

If one has multiple cards, it is better to close the newer cards first. While closing the credit card, consider the age of the card since the age of the credit account has a major impact in the computation of the credit 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.

Losing an old credit account may reduce your credit score. Losing a recent credit card on the other hand may not have a major impact on your credit score.

Follow up with banks

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.