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Find Out the Pros and Cons of Closing a Credit Card
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Credit cards are the best way to tide over a short-term financial crisis. When you apply for a credit card, you get assigned a credit limit by your bank based on your credit score, which you can use to purchase goods and services. However, you may not use a credit card forever. Your requirements may change along the way, due to which you may have to switch to another one that best serves your needs.
If you are closing your old credit card, it would be wise to know the advantages and disadvantages before doing it. This way, you will have a clear idea of how it will work out for you.
Advantages of Closing an Old Credit Card
If you have a credit card that is no more in use, here are the benefits that you can avail of by closing it down:
No Annual Fee
When you apply for a credit card, it comes with an annual fee which you will have to pay every year. Generally, it ranges between Rs. 1000 to Rs. 1500 depending on the type of card you have. However, if you are closing your credit card, you will no longer have to worry about paying an annual fee.
Get your deposit
Most people with low credit scores apply for a secured credit card. It is easy to get approved for and can help in building a credit score. To get a secured credit card, you will need to deposit a certain amount with your bank. So, if you want to switch to an unsecured credit card, you will have to close your secured card. By closing down your secured credit card account, your bank will return your deposit.
No temptation to use the card and end up in debt
At times, some people get tempted to use a credit card to purchase unnecessary things. But, the downside is that you may end up in a debt that is difficult to pay off. That is why banks advise their customer to use their credit cards wisely.
No other credit card to keep track of
Leaving your credit card account open that is no longer in use is not a wise decision. You will have to regularly manage it. But, if you do not use it for a long time, your bank will close your credit card. You will have to ensure it is active by making small purchases on it periodically and pay off your bills on time.
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Disadvantages of closing an old credit card
Closing your credit card account comes with certain disadvantages that you will have to be mindful of:
Reduce the average age of your credit history
When you apply for a credit card, the bank checks your credit score, which is generally determined by your credit history, length of credit history, credit utilization, etc. When you close your credit card, it reduces the average age of your credit history, therefore harming your credit score. If you wish to maintain a healthy credit score, you will have to keep your old credit card accounts active. You will have to charge something on them periodically and ensure to make repayments on time.
Harm your credit utilization ratio
It will also harm your credit utilization ratio if you chose to close down your old credit card. The credit utilization ratio is the amount of credit used against the credit available. It is one of the crucial factors that go into your credit score calculation. So, if you close your credit card account with ample credit card available, you will likely have a higher credit utilization ratio which will lower your credit score.
No credit to avail of
It is not advised to use your credit card to make purchases that you cannot afford. However, at times, you will have to borrow to meet a short-term emergency expense that you can repay on or before the due date. But, if you close your credit card account, you will have no credit to meet your financial requirements. Yes, you can apply for a new credit card, but it will take at least 10 to 15 days to get approved.
You will miss out on credit card benefits
Credit card benefits include airline lounge access, purchase protection, extra miles, etc. Another con of closing your credit card account is that you will miss out on such credit card perks. Though it may not make much of a difference, you could regret your decision if your financial circumstances change in the future.
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In short
So, what is the best choice for you? Should you close down your credit card account or keep it active? It generally depends on your circumstances. If your credit card is not costing you a lot of money, and you are not going to get tempted to use it for unnecessary purchases, it is better to keep it open. However, you may have to make occasional purchases with it.
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