ATM :: How to close a credit card

ADHIL SHETTY CEO, | Nov 13, 2015, 06.58 PM | Source:
Closing a credit card is as important an event as opting for one. You have to follow the due process, to ensure that you do not suffer in future.


A credit card is a handy financial product that not only facilitates the buy-today-pay-tomorrow paradigm but also aggregates all your payments and acts as an emergency credit line should such a need arise.

However, if you need to cancel your card, there are certain considerations to grapple with. You also need to know that, if done the wrong way, it could adversely impact your personal finances and affect your credit standing.

Three essentials when closing your credit card
If you have decided to cancel your credit card, use this 3-step approach for an effective close.

1: Communicate with the bank: Communicate with the bank that you plan to close your credit card. You can get in touch with their 24/7 helpline and determine the balance that is due on your card. Send a written communication to your bank informing them about your card cancellation request. This can be useful should any dispute arise between you and the bank at a later stage.

2: Clear all your dues: After confirming the due amount on your card, you can choose to repay the dues as per your billing cycle. It is up to you whether you want to settle your dues as a onetime payment or in installments. The thing to remember here is that if you choose to pay in installments, your balance will continue to attract interest and you will be able to close the card only when it is fully settled.

3: Follow up on your card cancellation request: Do not stop at paying your dues and requesting for card closure. Many cardholders may incorrectly assume that their dues are fully repaid, while, in reality, they may still owe the bank some money. Make sure that you are at the same page with the bank and seek a no due certificate from them.

Importance of a no due certificate
After you are done paying your dues in full, do not overlook the importance of getting a written acknowledgement from your bank. Should there be any dispute between you and the bank, the no due certificate is eventually the deciding factor. Do not rely on verbal commitments; instead, opt for a no due certificate without fail.

Credit card cancellation may affect your credit score
Before you go ahead and cancel your credit card, know that cancelling a card can impact your credit score.

When you close one of your credit cards, you are also reducing your overall credit limit. This means your credit card utilization numbers will go up with the existing cards. Banks and card issuers may take this as a signal that you may be more likely to default on your future payments, thereby making you a riskier customer.

As an illustrative example, let us say you have two credit cards with a combined limit of Rs. 1 lakhs, each card having a credit limit of Rs. 50,000. Let us assume that you are spending Rs. 50,000 on both your cards collectively in a month. Therefore, your credit utilization is Rs. 50,000 out of a possible Rs. 1 Lakhs, which comes to 50%.

Now, if you close one of your credit cards, your credit limit is reduced to Rs. 50,000 only. If you spend the same amount as earlier, your credit utilizations is now 100%.

Effectively, this increased credit utilization with one card seen negatively by credit score calculators, as they will consider you as a person depending more on credit. This will impact your overall credit score.

Disputes with banks regarding closed cards
If you do not close your credit card in the prescribed way and get a no due certificate from your bank, do not assume that your card is closed automatically. There have been cases in the past where card holders have been embroiled in disputes with card issuers as they come to know only much later after “closing” their card that there are still dues on their card. In reality, not only would there have been pending dues, but also the card issuer would have charged interest on the same. Most such disputes may have resulted from miscommunication; nevertheless, these will affect your credit score badly.

Closing a credit card is just as important as opting for one. Always follow the right protocol when opting for a credit card closure and check its impact on your credit score once done.

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