A friend of mine once told me he possessed 13 credit cards! He had just started earning and the income was just enough for one person. With an education loan to pay off and having to send some money back home, he was soon signing the T&C of one credit card company after another in order to just stay afloat. It didn’t help that banks were eager to hand out credit cards to just about anyone with a bank account.
Soon he realized that rolling-over credit regularly and paying-off outstanding dues on time was exhausting. Before long, he decided he could do very well with just 2 of them and went about closing the rest.
Credit cards are useful but expensive
Credit Cards are tricky. Some people are able to utilize them to the max. Some, like me, grapple hopelessly. Credit cards are still extremely useful for some transactions where other payment options are not available like booking an air ticket over phone, obtaining an international calling card or hotel booking abroad. Most credit cards also provide added incentives like discounts at restaurants, movie theatres, loyalty points for fuel or frequent flights etc. as means to improve customer loyalty.
But for all the benefits that they give you, they charge you heavily. Credit cards typically charge interest rates higher than any other credit product available currently. Taking a citizen-centric stance, RBI Governor Raghu Ram Rajan has recently directed banks and financial institutions to re-assess their interest rates for credit cards. However, it must be understood that a credit card is a source of very short-term finance. Given the prohibitive rates, they should used for urgent expenses only. As far as possible, you should opt for alternatives. For medical emergencies one should use medical insurance. You can also take a loan against property or a personal loan for larger fund requirements– both of these loans are available at better interest rates. Also with the onset of internet banking and seamless use of debit cards, it is possible to survive almost completely without a credit card. Or like my friend, restrict them to one or two.
Regardless of the reasons, if you too wish to close one or some of your credit cards, here are a few things to keep in mind:
Not using the card does not mean it is cancelled
A credit card does not stand cancelled just because it has not been used for while. Most cards these days do not charge annual fees. How do they make money? By penalizing you. If even a small amount of debt is left unpaid, the credit card company will charged you an interest on it and inform you of the same in monthly statements. These rates are exorbitant. What could happen if you ignored these statements and left your credit card dues unpaid? – Well, thankfully the days of ‘recovery managers’ are gone, so no one may come knocking on your doors and harass you till you cough up the money. But the recovery manager has been replaced by a very efficient system that watches over every borrower. So if you are not using your Credit Cards, close them.
Settlement is not the same as closure
Under some circumstances, credit card companies offer to ‘settle’ a payment and close the card. This refers to the customer/account holder repaying only the principal amount due to the credit card. The credit card company writes off the interest component accumulated. However, it is important to understand that the non repayment of interest component is recorded. This directly reflects in an individual’s CIBIL (Credit Information Bureau India Ltd.) report.
Not closing Credit Cards could impact your Credit Score
CIBIL is a credit information bureau that began operations in the year 2000 under licence from the Reserve Bank of India. It is a central institution that obtains monthly reports from its member organisations like finance companies, banks etc. The information pertains to loans availed and repayment thereof by companies and individuals. When approached for any kind of loan, financial institutions and banks refer to a CIBIL report of the individual or company. A Credit Score between 750-900 is considered favourable. The credit score is effected by many factors. One of them is non repayment of credit card dues or even an irregular track record of repayment. It is important to know that CIBIL views an individual in terms of total credit availed vs debt repaid. This includes credit available on credit cards. Read more about improving your Credit Score here.
Keeping the above factors in mind, here are the general steps towards safe closure of a credit card:
1. Pay-off all your dues and maintain all records of last payments.
2. Inform the credit card company of your decision to close/cancel the credit card over phone and email.
3. Obtain a final statement of transactions and ensure all debt has been repaid.
4. Obtain and file away a statement from the credit card company that all dues have been settled in full.
3. Cut up your credit card and dispose it!
Here are some final tips: Use your Credit Cards diligently. Close the unnecessary ones. Keep a careful track of your credit.
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