Should you close your unused credit card or keep it open?

Closing one or more of your credit cards will relieve the burden of keeping track of household financial progress, enhance awareness of payments made, and prevent the occurrence of late fees. (Image: Freepik)

Credit cards serve as an essential financial instrument, providing ease of use, incentives, and a temporary interest-free credit line within a single billing cycle. Nevertheless, a lingering question remains regarding your credit: should you close your credit card or keep it open? Should you acquire a new card and find that your current card is no longer necessary, you might want to contemplate relinquishing your old card. However, terminating your credit card should not be rushed, even if it is no longer required.

There could be several legitimate justifications for wanting to deactivate the card; however, there are also certain factors that, once known, may make it difficult for you to relinquish your current card without hesitation. Let us delve into the process of making this decision!

Pros of Closing Your Credit Card

Getting Rid of Annual Fees: Numerous credit cards impose an annual fee, which can vary from a few hundred to several thousand rupees. Should you find that you are not utilizing a particular card frequently, it may be advisable to close the account in order to prevent recurring expenses.

Simplification and Overspending: At times, individuals may find themselves inclined to overspend due to the easy accessibility of credit cards.Closing the card in this situation may assist in reducing the urge to spend excessively and stay within your financial limits, ultimately leading to improved financial management.

Furthermore, managing several credit cards can be challenging due to the varying billing cycles, due dates, and reward systems associated with each one. Closing one or more of your credit cards will relieve the burden of keeping track of household financial progress, enhance awareness of payments made, and prevent the occurrence of late fees.

Avoid Identity Theft: The more credit cards you have, the greater is the chance of identity theft. Closing extra, unused credit cards will help lower the chances that your personal information could get into the wrong hands.

Stop Unneeded Debt: Too many credit cards with high credit limits may lead to debt accumulation if you are not careful with your spending and are not keeping your finances in track. Closing a card would save you from the temptation of borrowing what you cannot afford to pay back.

Cons of Closing Your Credit Card

Impact on Credit Score: One of the most prominent disadvantages of closing a credit card could be that it may negatively impact your credit score. Credit score is impacted by two different things: credit utilisation ratio (CUR) and the length of your credit history. Closing the card increases the former—CUR— and shortens the latter, both working against your score.

Adhil Shetty, CEO of Bankbazaar.com, says, “A good credit score helps you qualify for a loan with competitive interest rates. When you close a credit card, it might actually bring down your credit score and you may find it challenging to avail products like house loans, personal loans, etc. on lower interest rates. These points you must keep in mind while dealing with closure of your card where your credit score may get impacted and affect your creditworthiness.”

Reduced Credit Line: In times of emergency, credit cards provide a critical line of credit. Closing a card reduces the availability of such credit and may throttle back your financial flexibility when you need it most.

Rewards and Benefits: Credit cards give you rewards points, cashbacks and discounts, plus all the added perks like access to airport lounges, dining and shopping discounts. If you are closing your card, you must keep in mind that you are going to lose out on these benefits.

Important Tips to Keep in Mind

Check Credit Report and Pay Off Balances: It is essential to check your credit report for information regarding the consequences of closing the card on your credit score. Ensure all information is accurate and updated.

Before you close your card, it is important to fully pay your card dues to avoid any late payments or interest or penalties. If possible, keep a record of payments to contest in case of any confusion with the issuer.

Redeem Reward Points: Redeem your currently-accrued reward points and other benefits before you close the credit card to get maximum value and benefit.

In conclusion, if the main reason for closing a card is due to the annual fee, consider downgrading the card to another no-fee card with the same issuer. Closing a credit card may appear to be a favorable decision, however, it is important to consider the potential drawbacks that could negatively impact your financial well-being. Weigh the pros and cons in order to assist you in making a decision.