If you have a credit card that you barely use, or are disgruntled by too high an annual fee, then it is understandable that you could be contemplating to cancel your credit card.
Although a small act of cancelling the card appears innocuous, but can have serious consequences with regards to your credit score. Yes, it can impact your credit score adversely.
Sounds strange, but true!
Let us explain how it happens. There are two ways in which credit score suffers upon cancellation of credit card. First, the credit utilisation ratio falls when a credit card is cancelled.
This ratio is calculated by dividing credit card balance with the overall credit limit multiplied by 100. So, higher the ratio, lower the credit score.
Second, cancellation of credit card leads to reduction of average age of accounts in your credit report. And it is worth noting that lower the average age of accounts, poorer is your credit score.
Why do you want to close it?
Before you decide to close your credit card account, make sure that there is a genuine reason for the same. It could be important to close a credit card because of a number of reasons.
One of them could be that the bank is charging a high annual fees. The other reason is that you have more number of credit cards that you need. The third could be that it is a joint account that you plan to close for some personal reasons.
How to ensure your credit score does not suffer?
If you don’t want your credit score to suffer then you can keep the credit card for some more time. To avoid paying off annual fee, you can ask for this fees to be waived off.
Also, you can pause the credit card account for a few more months to avoid overspending. However, if there is no choice left but to cancel the credit card, then you must pay off all the credit card balances at the outset before cancelling the credit card.
Then in case of auto payments that are set on the credit card, it is advisable to stop the auto payment or else, more it to other available options.
After cancelling the card, it is recommended to send a notice in writing to the credit card issuer to confirm the cancellation.
Also, it goes without saying that the credit card should be physically destroyed once cancelled.
