“When I was young, people lived from paycheck to paycheck. Today, it seems like they live from credit card payment to credit card payment.”
The above sentiment by Robert Kiyosaki sums up our entire financial life. Dwelling between credit card payments, somewhere we find ourselves.
Before moving ahead, let us understand the basics.
What is a Credit Card?
As the name suggests, a credit card is an instrument issued by the bank that enables the holder to borrow finances for payment of goods and services.
The borrower returns the money with added interest and applicable charges at a time interval mutually agreed by the contract’s parties.
Credit card is also a well-known technique to build a credit score. They comfort the need to carry cash everywhere.
How Does a Credit Card Help?
A credit card is an easy-to-carry instrument that does not only extends borrowed funds but also assists you in building a better and healthier credit score.
What is Credit Score?
A credit score is a milestone or a number assigned to an entity, ranging from 300 to 850. It displays a customer’s trustworthiness in respect of credit and borrowed funds.
A bigger score indicates better creditworthiness. It becomes easier for lenders to lend money to people with a higher credit rating.
It is based on your credit history and utilization. The score considers many factors which the lenders scrutinize before reaching a conclusion.
You must wonder what the term FICO means?
Well, the mechanism of credit score was initially designed by Fair Isaac Corporation (FICO). It is the most commonly used credit score calculating system.
Credit Score easies your approvals into credit applications. It also lowers the interest rate if you achieve a credit score of 700 and above. This is an ideal range that one must maintain.
Following are the different categories for a Credit Score:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Five Key Factors Considered to Calculate an Accurate Credit Score
- Payment History: It accounts for 35% of the score. The swifter payments you make, the better score you achieve.
- Total Amount Owed: It counts for 30% and also considers the percentage of the utilized amount from the total amount available on the credit card.
- Length of credit history: It occupies 15% of the score. The longer the credit history is, the better. It does not say that you have to delay a payment for a long time. It reflects that you must be a beneficiary of borrowed funds for a long time. The longer, the better.
- Types of credit: It demonstrates the use of your borrowed funds and accounts for 10% of your credit card score.
- New Credit: It reflects all the accounts that a holder maintains. Also, any new accounts or credit cards one has applied recently. The lender prepares a detailed summary of new credit before based on these factors before concluding. It counts for 10% of the credit score.
Canceling a Credit Card
There may arise certain circumstances when one wants to cancel their credit card. The reasons can be multi-fold. Experts generally condemn the idea of credit card cancellation because that may hurt your credit score.
This article shall unfold the procedures and considerations that will assist you in canceling your credit card.
Things to Keep in Mind Before Canceling Your Credit Card
1. Pay off any remaining balances: One cannot cancel their credit cards if they have any unpaid balances and liabilities to pay off.
You need to ensure that all such liabilities and contingencies are paid beforehand.
Also, please ascertain that the card is not linked to any schemes of subscriptions and autopayments.
If so, the holder must abolish any such connections with the card, regardless of continuing such subscriptions.
2. Redeem any rewards: Step 2 of your credit card cancellation process would be to claim any pending rewards if you use a reward credit card.
Any unutilized cash-backs, bonuses, or points shall be forfeited once the account ceases. To arrive at the benefit of this negotiation, a holder should ascertain any pending rewards.
If so, they must be redeemed in due course of time.
3. Notifying the Bank: A vital step in this procedure is to intimidate the bank with every detail, in good faith and honesty. Before confirming the cessation of your account, please ensure that there are no pending balances that need to be taken care of.
Once verified, you can notify the bank’s representative to permanently close the account. Any offer regarding retention of closure must be discouraged.
You would also like to ensure you get the required details regarding the permanent deletion of your account with the concerned bank.
4. Send a cancellation letter: It is a key step and must be followed with precision. A cancellation letter should include all the details you obtained under step 3.
This letter acts as an added layer of protection, guarding you against the obscenity of human behavior.
You can also demand a confirmation from the bank, accepting that your account was closed at zero/nil balance and no pending liability needs to be paid off.
5. Credit Report: Arrival of your credit report indicating a canceled credit card may take a while. Once it knocks at your door, verify the information.
The reason stated must be “closed at customer’s request.” If you witness any other reason like “closed by the issuer,” instantly contact the bank and get it rectified.
6. Destruction of your credit card: Now that your account has been officially closed and all the related documents have been filed and reported, you must safely destroy or dispose of the card.
Impact of Credit Card cancellation on your credit score
As already stated above, canceling a credit card has an undeniable negative impact on your credit rating. It has the potential to degrade your score.
When you close your credit card, you tend to pause your credit utilization ratio over the course of time, which affects your score.
What is Credit Utilization Ratio?
It is a technique to measure how much of the holder’s total credit is being used. To achieve a good credit score, one must carefully balance underutilization and overutilization.
To witness a healthy score, the holder must pay off the debt every month, as soon as possible. This brings two-fold benefits.
- A decent credit score
- Less Interest payable
But, one must consider, though your credit rating is affected, your credit history would not be. It is a myth because people tend to use the two terms interchangeably, but a closed account will remain under reports for up to 7 years.
Can I cancel a Credit Card After the Application Process is Complete?
Canceling your credit card initially may not impact your credit rating massively. It shall affect your FICO score minimally by just around 10%.
You need to notify the bank and instruct them to do the same. Make sure you achieve nil balances before canceling your credit card.
If you wish to cancel your application. Intimidate immediately to your issuer and inform them the same. If your credit card application is under review or pending, they may be able to cancel it on your request.
Moreover, if you are unable to decline the application, you must apply for cancellation as soon as the approval and the card come by.
Can I Apply for a Fresh Credit Card After Cancellation?
To apply for a new credit card, you will have to keep your calm for 30 days after canceling your old one. You can also apply for the same credit card you canceled.
If you are about to apply to another bank, the time gap may vary depending on the terms and conditions, nature of your card, and of course, your credit score.
Credit has occupied a vital position in our regular lives. Credit Cards have eased the process to attain borrowed funds, which have assisted our lives to exist freely.
But with the same freedom comes responsibility. Borrowed finances are a liability that needs to be paid back on time.
It is not about building a good score on the paper, but morally too. And it is rightly said, “Quick to borrow, is slow to pay,” which must be altered. Understanding the ethics of finance is every human’s role.