Planning To Deactivate Existing Credit Card: Check Pros, Cons

A credit card is one of the most useful tools for meeting your short-term financial needs. It allows you to make a payment by borrowing money, which you can pay back later.

At the end of each billing cycle, you receive a statement with details of your purchases and the total amount you owe, along with the due date for payment. 

However, sometimes people close their credit cards as well. There could be several reasons for doing so, such as getting a new credit card or not wanting to pay the annual fees anymore.

While it could be based on your financial needs, it is important to understand the complexities of closing a credit card before actually doing so. Generally, closing an existing credit card impacts your credit score.

Here are some of the factors you must consider while closing a credit card. 

• Avoiding High Annual Fees: Most financial institutions usually charge cardholders an annual fee for owning credit cards. In many cases, it is a significant amount. You need to judge the benefits you get from the card and the annual fee you pay and ask yourself if the fee is justified. If not, you may consider closing the credit card.

• Beating Spending Temptations: Several people fall into debt due to the misuse of their credit cards. Eventually, the amount that needs to be repaid can become a financial burden. If you see yourself struggling against overspending, closing your credit cards could help you avoid a debt burden.

• Makes Managing Multiple Credit Cards Easy: If you have multiple credit cards, you will need to track the outstanding amount and due date for payment on each of the credit cards. To make it easy to manage your credit cards, you could close credit cards that you don’t use or require anymore. 

• Shortens Your Credit History: A credit score is an important metric that financial institutions check when you apply for a loan or credit card. If you close a credit card, it lowers the average age of your credit accounts and can hurt your credit score.

• Increases Your Credit Utilisation Ratio: The credit utilisation ratio shows the amount of credit you are using compared to your total credit limit. Closing your credit card reduces your overall credit limit. This can increase the credit utilisation ratio, and thus hurt your credit score negatively.

• Missing Out On Credit Card Benefits: Reward programmes are a big reason why credit cards are appealing to cardholders. These programmes, which offer points, cashback or air miles, encourage spending and are a key reason for using credit cards. If you close a credit card, you will lose the benefits it offers. 

Closing a credit card should be based on your financial planning and spending needs. While closing a credit card may negatively affect your credit score, it may also help in reducing your overall debt burden or unnecessary spending. It's advisable to evaluate all key factors before placing a request to close your credit card.