Old credit card: Keep it or cancel it, what to do with it?

A good credit score helps you get loans at upgrades. Therefore, a good credit score means easy access to credit, which reflects positively on your money management

If you have just started earning, chances are you must have got yourself a credit card to fulfil your needs that your income don’t permit. If used judiciously, a credit card is a great payment tool. Since you are at the beginning of your career, you must never take steps that can result in woes like a debt trap. Once such step is going for additional credit cards with tempting offers. If you own multiple credit cards and are considering closing or canceling any of them, here is what you need to know.

Impact of closing an old credit card

Before we understand what closing a credit card does to your financial health, let’s first understand what your credit score is. It is a three-digit numeric score that determines your creditworthiness and what lenders consider before providing you a loan or credit card. Your credit score is shaped by various factors such as paying your EMIs and card dues on time, the amount you have borrowed, credit limit available, etc. One of these factors is the age of your credit account. If you have been using your credit card for long, it adds to your credit score, revealing you to be a judicious user who repays his dues.

A good credit score helps you get loans at the best interest rates and credit card upgrades. Therefore, a good credit score means easy access to credit, which reflects positively on your money management and debt repayment habits. However, if you cancel a credit card which you have been using for a few years, it may have a small, negative impact on your credit score.

Also, closing a credit card increases your credit utilization level. For instance, you have three credit cards with a combined limit of Rs. 2,00,000. You spend about Rs. 50,000 per month through them. This results in a collective credit utilization ratio of 25 per cent. Now if you close a credit card with a limit of Rs 1,00,000, you must spend Rs 50,000 by using the remaining two credit cards with a total limit of Rs 1,00,000. This results in a utilization ratio of 50 per cent. A high credit utilization ratio may impact your credit score negatively. Ideally, you should keep this ratio to 20-30 per cent.

When should you cancel your old credit card?

While cancelling a credit card is not a great idea, you can still consider it in certain scenarios. Here are a few of them:

– If your credit card company is charging you a high-interest rate or annual charges, considering switching a card that is more attractively priced.

– If your credit card limit is lower than your usual requirement, switch to a higher limit card. Most credit card companies increase your spending threshold at your request provided your credit history has been good. If this is the sole reason, you can first talk to your existing card company about increasing your limit.

– If your spending habit has changed and a credit card doesn’t fit into your lifestyle anymore, you may close such a card and get a new card that suits you.

Additionally, do compare the total cost of owning a credit card, if you are closing an old one for a new one.

Do remember to check all fees, effective annual percentage rate (APR), benefits and offers, and any other feature and then decide. Do not go by one parameter like annual fee or APR alone.

Steps to cancel your credit card

The first and most important step is to pay your outstanding card dues. Also, make sure to redeem the accumulated reward points. Call the customer care of your credit card provider or check their online facility. Pay the amount fully so that there is no principal or interest outstanding. Check the statement after you clear the balance.

Sometimes, there are a few charges that are not reported immediately but reflect in the credit card statement after a few months. For example, when you redeem the accumulated reward points, there is a redemption charge levied for it. It may take around 2 to 3 billing cycles for the charge to reflect in your statement. So, you must consider all unreported charges before closing the existing credit card.

Finally, call customer care and close the credit card. They may persuade you to keep the card but tell them clearly about the reason behind your decision. Ask for a timeline for the closure and call back if it doesn’t happen.