Credit cards serve as one of the key financial instruments for users to manage day-to-day expenses. However, there are instances when users may consider closing it to reduce overspending and to avoid the hassle of keeping track of multiple cards.

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Here are five things to know if you are planning to close your credit card:

Pay off balance in full

According to Gaurav Chopra, Founder and CEO of IndiaLends, before closing credit cards, it is extremely important to clear all dues and pending payments as these will attract interest and late penalty charges.

“This will be a clean break between the user and his/her credit card company. Moreover, this will also protect the credit score. If the user is unable to pay off dues due to liquidity issues, he/she can transfer the credit balance to a new credit card by initiating a transfer process with the help of the bank,” Chopra states.

Ensure there are no standing instructions on the card

There are instances when users may have a Netflix subscription, or they may be paying EMIs and utility bills from the card. It is advisable to stop these payments before closing the card.

“These payments do not stop automatically once users initiate the process of closing. Until users get the no-dues certificate or written confirmation, they can't be sure that the card has been properly closed. The bill will continue to build and if users miss the payments due to being unaware, the credit score may dip and users will also be charged with penalty charges if the money is not paid within the due date,” Chopra mentions.

Age of credit card matters

While closing the credit card, Chopra asks individuals to consider the age of the card since the age of the credit account has a major impact on the computation of credit score.

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“The older the credit card is, the higher is its contribution to the credit score. Having an old credit line indicates that users have been a responsible borrower and therefore creditworthy thus being eligible for the best loan and credit card offers,” Chopra adds.

No big loans coming up anytime soon

Usage of cards reveals that users have been responsible borrowers throughout that period thus contributing to credit scores. Closing credit card reduces credit scores.

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"The older the card, the more is the contribution to the score and larger is the drop. A low score means a high interest rate on loans. Hence, if users need to take an education loan or home loan, this can be very expensive. So, it is advisable to avoid closing cards if users are planning to take a loan soon," Chopra explains.

Redeem all benefits before closing card

Among the many advantages, a credit card offers are its reward points which can be redeemed for cashback, discounts, coupons, etc. Many times a lot of people do not keep a tab on their reward points being collected over the years. So, before closing their credit card, Chopra advises individuals to redeem all existing points and only then apply for cancellation.

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“They can redeem points by visiting the reward catalogue and by choosing any of the available options to redeem points,” Chopra tells.

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First Published:Aug 25, 2021 2:13 PM IST