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 or cancelling it. While the cancellation can be done by either calling the customer care or putting an online request, there are certain factors one should consider before closing the credit card.
Here are some of them:
Move the standing instructions
The most important thing to do is to move the standing instructions, if any, on the credit card to another credit card or bank accounts, according to Sahil Arora - Director, Paisabazaar.
Also read: 5 ways to increase your credit card limit
"Not changing those standing instructions may lead to non-payment or delay in payments of the online subscriptions, insurance premiums, or utility bills," he explains.
Repay the amount
Those having existing EMIs/loans on the credit cards should repay the outstanding amount and the additional charges in one go before closing the card, as per Arora.
Also read: How to choose the best credit card for you?
Credit card issuers usually club the outstanding amount as one transaction to be repaid before the credit card closure.
Consider the credit utilization ratio
Those holding multiple credit cards should also consider the possible adverse impact of credit card closure on their credit utilization ratio (CUR). Closing the credit card will increase the CUR, i.e. the proportion of the total credit limit used by the customers if they continue with the same level of credit card spend after the closure of one or more credit cards.
"Lenders may consider CUR exceeding 30-40 percent regularly as a mark of credit hungriness and as a result, the credit bureau may lower the credit score if users exceed it frequently. This may, in turn, reduce future loans and credit card eligibility. Thus, before closing the credit card, users should request other credit card issuers to increase the credit limit. An increased credit limit can help in reducing the risk of exceeding the 30-40 percent mark in CUR," suggests Arora.
Redeem reward points
Also, before closing a credit card users should redeem the reward points accumulated in the credit card. These reward points can be used for purchasing merchandise, vouchers, travel tickets, paying credit cards outstanding, etc depending on the reward point program of that credit card.
Users should also factor in the redemption charges as some card issuers charge redemption fees at the time of redemption, according to Arora.
Other factors to consider
According to S Ravi, Former Chairman of BSE, Managing Partner of Ravi Rajan & Co, it is imperative to inform the credit card issuer that the card is closed and all obligations are fulfilled. Additionally, users should destroy the card so that it is not misused later.
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First Published: IST