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Snipping your card isn’t enough

Adhil Shetty
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Banks will not cancel your card unless all dues are fully cleared.
Banks will not cancel your card unless all dues are fully cleared.

Satish had applied for a credit card from ABC Bank about a year ago. Twelve months after getting the card, Satish realised that he did not receive much benefits and it was simply a headache. So he decided to cancel the card.

Satish first contacted the bank’s customer service by dialling the number given behind the card. He then found out the actual amount outstanding in the card, made an online payment and cleared all dues in the card account. Satish kept a record of his payment as proof.

On making a full payment of the outstanding balance, Satish contacted customer service again and placed a request for cancellation of the card. He made a note of the date and time of the call, as well as the name of the representative who took down the request. Satish also got a request confirmation number, as a reference for future correspondence.

Satish then wrote to the credit card company and sought verification that the account has been closed. He mentioned the details of his call with the customer service representative. He sent the letter through Registered Post, so that there is a legal record of the same.

After a few weeks, Satish received confirmation from the bank that the credit card has been cancelled and closed. He then proceeded to cut the credit card into small pieces across the magnetic strip.

Keep in mind

What Satish did was the correct step-by-step procedure in cancelling a credit card, which must be followed diligently. What are the points you need to note should you want to cancel your card?

The first and most important thing to remember is that the bank will not cancel your card unless you have paid all dues. This not only includes the expenses you incurred on your card, but also includes all interest, fees and charges on the card.

Sometimes, you may cancel your card after the billing date, and as a result, there may be a residue amount which is not reflected in your last statement. Other times, the amount outstanding may be quite large to pay it all at once. In such cases, if you make regular payments, either on a weekly or monthly basis, you will still accrue interest on the balance.

Many customers feel that some card charges are unfair and proceed to cancel the card without paying these. However, the bank will not cancel the card unless these dues are cleared. Further, you will have to continue paying interest and late payment charges on these dues until you settle everything. Simply cutting the card at your end and mailing it to the bank will not cancel the card. Insist on getting a written acknowledgement from the bank that the card has been cancelled.

Non-closure

If you do not follow the proper steps in closing the card, there may be a case when it may result in an outstanding balance on your card. For instance, if you do not get an acknowledgement from the bank, the bank may charge renewal fees which will show up as unpaid dues, even though you may have cut the card. This will get carried on month after month, attracting penalties. This will automatically reflect in your credit score, affecting your future loan prospects. So remember to actively follow up with the lender and get your credit card closed.

Does it affect your credit score?

By closing a credit card, you are reducing your overall credit limit. As a result, your credit utilization will go up on an overall basis and thus reduce your credit score.

Let’s say you have three cards with a total credit limit of Rs 1.5 lakh and you spend Rs 75,000 in a month. So your credit utilisation is 50 per cent. You close one of the cards which has a credit limit of Rs 50,000 as you are not using this card. In that case, your overall credit utilisation will be 75 per cent (75,000/100,000). This can suggest that you are credit hungry in nature.

Does this mean that you should not close unused cards? No. It is better to close unused cards to prevent misuse or fraud. However, if you wish to close more than one card, you should do so gradually and not all at once.

Further, the older the credit history, the better it is for your credit score. A long track record will help lenders judge your track record and hence determine future behaviour and default chances. Hence you must always look at keeping older credit cards alive, and close the newer ones if the need arises. If you already have a weak score, then work on improving your score first before proceeding to cancel the cards.

(The writer is CEO, BankBazaar.com)

(This article was published on August 17, 2013)
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