Insights

When should you close your credit card?

July 24, 2014 . FundsIndia Desk

This article is a contribution towards our financial literacy series. It has been written by a specialist in credit and debt counseling – Satish Mehta, Founder and Director of www.credexpert.in.

cutcard2Do you feel that you have too many credit cards? Are some of them lying idle with you? The correct step is to close these credit cards. But before doing that, remember: closing your credit cards has an effect on your credit score.

It impacts the “credit utilization” ratio, i.e., credit used against the available limit. Credit utilization ratio is one of the factors based on which credit scores are calculated. Before closing that credit card, understand if it is the correct move for you.

Consider the following:

Are you a spendthrift: If you are a spendthrift and end up making purchases which are beyond your servicing capacity, then you should close your credit card. Although this is not the best solution to the problem, it definitely will ensure that you do not fall into a debt trap. It also reduces your options of shopping around randomly without having a genuine need.
High fees: If your credit card has high annual fees, then you should repay your balance and close your credit card. Credit card issuing companies do offer cards with “zero” annual fees for the initial 1-2 years. These are steps to lure you to buy the credit card. But if you feel that the annual fee charges are high and unfair, then you should do away with the card.
Repayment issues: If you have only been repaying the minimum amount due on your credit cards, or if you frequently end up making late payments, then it is time to close your credit card.
Balance transfer: If you have opted for a balance transfer, then it might be a good move to close that high interest credit card. The fact that you have opted for a balance transfer indicates your inability to service the card.

Besides the above-mentioned reasons, if high fees, high interest rates, zero loyalty programs or a strain in repaying monthly dues are pestering you, then it is time to close your credit card.

ABOUT THE AUTHOR

Satish Mehta is the Founder and Director of www.credexpert.in – a credit and debt counselling company that provides end to end customized counselling to individuals by handholding them through their credit life cycle.

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2 thoughts on “When should you close your credit card?

  1. With regards to “credit utilization” ratio:

    Let’s say I am using above 90% of my credit limit every month and repaying the total due every month, then how it will affect this ratio? or it won’t affect as long as I am repaying the total due on time.

    Thanks

    1. Hi Sri,
      Your payment history, although very important, is only one of the components of your credit score. Other components include your credit mix (Number of secured and unsecured loans), number and recency of accounts, and credit utilisation. Hence, even if you are paying your dues on time, and it is always necessary to do so, a continuous high utilisation on your credit card will indicate that you are highly dependent on credit. In case of any default (for any reason whatsoever) on this high utilisation, the debt burden may be very high. Thus, it will have an impact on your score.

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