Credit cards are one of the most widely used financial instruments in today's world, and they have found their way into practically every wallet and pocket, not just in the UAE but around the world. When used appropriately, credit cards can be a wonderful financial tool, allowing users to properly manage their costs while also earning benefits.
Credit cards can be used to make online payments in addition to conducting transactions at stores, restaurants, and retail outlets, making them versatile. Despite the numerous advantages, many people are afraid of credit cards and avoid using them.
In truth, customers must recognise that, at the end of the day, a credit card is a financial tool whose utility is entirely based on the user's capabilities, just like any other tool. Users may get the most out of this product if they have the necessary knowledge and skills. If you can't handle your credit cards, it's best to close them down to prevent becoming locked in a vicious debt cycle.
Before you close your credit card, it is critical to understand the benefits and drawbacks of doing so. We've created a new blog to give you with more information and ensure you're informed of all the consequences.
Advantages of Cancelling a Credit Card
To begin, we'll examine the benefits of cancelling a credit card and how it affects your financial situation and credit score.
Assists in Avoiding Debt Traps
The accumulation of debt due to reckless usage is one of the most common reasons that prompts credit card users to shut their accounts. It is critical to comprehend the user's mentality in order to comprehend this. When a cardholder has a credit card with a high credit limit, they are inclined to overspend, resulting in debt accumulation.
This debt accumulates over time, resulting in the formation of a vicious financial trap that is impossible to escape. The main advantage of cancelling a credit card is that it prevents users from succumbing to the lure of overspending, preventing them from becoming imprisoned in debt.
Prevents Identity Theft and Cybercrime
With technological improvements, the frequency of cybercrimes and identity thefts that leave victims insolvent has increased. Many people believe that if they use several credit cards, it will be difficult for hackers to gain access to their bank accounts or credit cards. However, regardless of how many credit cards one has, the risk of becoming a victim of cybercrime/identity theft is the same. Closing your credit card would eliminate this risk and save you time and trouble.
Save Money
As previously said, many people are unable to resist the desire to overspend, causing their budgets to become entirely ruined. If a person chooses to close their credit card, however, the possibility of overspending from available credit is removed, allowing them to conserve money.
Debt Consolidation
Many cardholders have many cards, which adds to your financial portfolio's load by simply raising the loan value. Using many credit cards to incur various debts on a regular basis will eventually result in an increase in your overall debt to income ratio. The debt-to-income ratio is calculated by dividing your total debt by your total income. In theory, the DTI ratio is inversely proportional to the likelihood of being approved for a loan. By cancelling your credit card, you can lower your debt-to-income ratio, making it easier to obtain loans.
Disadvantages of Closing a Credit Card
Every coin has two sides, and the same is true when it comes to cancelling a credit card. The disadvantages of closing a credit card will be discussed in this section.
Credit Timeline Shortened
Authorities who determine your credit score keep a close eye on when credit cards are used. When you close a credit card, you are reducing your entire credit history, which has a negative impact on your credit rating and score.
Credit bureaus examine the length of your credit history when calculating your credit score. You can minimise your credit history by cancelling a credit card that you've had for a long period. This has a negative impact on your credit score, causing it to fall.
Many cardholders mistakenly believe that cancelling a card with late payments instantly deletes the late payment record linked with the card. No way! Even if you close a card, late or missed payments are still taken into account when calculating your credit score.
Credit Limits Reduced
The aggregate of separate credit limits from multiple cards would be referred to as a user's total available credit limit. When a cardholder shuts one of their credit cards, the overall credit limit is reduced, and other perks such as cashback, incentives, and loyalty points are no longer available.
When you close a credit card, you lose access to the rewards, loyalty points, and other benefits that come with it. In addition to losing these benefits, your overall credit limit is decreased.
Let's have a look at an example. Assume Person A has three credit cards, each having a credit limit of Rs. 40,000, Rs. 20,000, and Rs. 30,000. He chooses to fold the final two cards. His entire credit limit has been decreased from Rs. 90,000 to Rs. 40,000 per month as a result of this move. This may have an effect on his entire budget and monthly expenses.
Leads to a Drop in your Credit Score
Closing a credit card account may help you pay off debt in the long run, but it will hurt your credit score in the short term. Your credit score is largely determined by your credit history and overall credit limit. When you close a couple of credit cards, your total credit limit is reduced, which raises your credit usage ratio. Your credit score will suffer if you have a high credit utilisation ratio.
Another option is to keep your cards open but with no outstanding balance. You'll have a higher credit limit and a lower credit utilisation ratio, which will help you create a good credit score.
Conclusion
Whether you're closing a credit card to save money or manage your debt, the choice should only be made after a thorough examination of your financial circumstances.
As a result, rather than cancelling a card, pay off any outstanding balances and keep it open without using it. This manner, the card remains on your credit history and serves as evidence of your ability to manage credit effectively. This aids in the development of your credit profile and score.
Although closing a credit card can provide you with piece of mind, it can also harm your credit score. So, before you sign a card, make sure you balance the benefits and drawbacks. Close the newly opened cards first if you decide to close a couple of cards. This will prevent you from erasing a big portion of your credit history.
