First and foremost, you should always pay off any outstanding balance on your card before cancelling it. That’s not just the amount that appears on your last credit card statement. There are also the recent “pending” charges that have yet to appear on your credit card statement. Failing to do so can have a very big impact on your credit score and your ability to engage with a bank for other services in the future, like home loans, car loans or even other credit cards.

If you don’t have enough cash on hand to pay off your balance, then you should consider getting either a debt consolidation plan or a balance transfer with a bank. These products are designed to help you make credit card repayments more easily over a course of a few months to a few years.

This makes balance transfer loans and debt consolidation plans ideal for consumers who need to get rid of their credit cards but are unable to do so because they don’t have enough money to pay off their balance right away. By breaking up your repayment into small portions spread over a long period of time, you can more easily manage your card balance repayment while still cancelling your credit card immediately.

Furthermore, some banks continue to charge credit card accounts that have been closed if your account carries a credit balance for more than a year after closure. Although the amount that the banks charge is usually small, it’s best to double-check that your account is reduced to a nil balance before closure.

The correct way to withdraw a credit balance on your account is to request the bank to pay you. Don’t make the mistake of logging on to your card account and transferring the money out. If you do take money out of your card, the bank could consider it as a utilisation of the credit card cash advance facility. This usually attracts an interest rate that could be as high as 28% per year in addition to a one-time service charge of up to 6%. Instead, you can simply request the bank to issue a check for any credit balance you may have on your card.

In the hurry to cancel a credit card, some individuals may forget to redeem their points or miles. However, the problem is that your existing points are forfeited at the time of cancellation. If you’ve used some of the best miles credit cards in Singapore for a few years, the miles that you have accumulated could be worth thousands of dollars.

That’s why you should always remember to claim the rewards that you are entitled to before you communicate your intention to cancel your credit card. By doing so, you will avoid the bother of having to convince the bank to reinstate your points.

If you have set up any recurring payment instructions from your credit card, cancelling your card will automatically result in these payments being discontinued. Therefore, you should not forget to reset your automatic payment schedule with your subscriptions with a different card right away.

Lastly, closing your credit card account could have the unintended effect of lowering your credit score. This is because, when you cancel a credit card, your total available credit limit drops by the amount of the limit on the cancelled card. This means that, if you have any other outstanding balances when you cancel one of your cards, your total credit utilisation will go up. This could adversely affect your credit rating .

Here’s an example to demonstrate the mechanics of this process. Let’s say that you have two credit cards – card 1 and card 2 – and you intend to cancel card 1. If you have some outstanding balance on both cards, the table below illustrates what your credit utilisation could look like before you cancel card 1.

If you cancel card 1 in this scenario, your credit utilisation shoots up from 21% to 29%, a factor that could lower your credit score despite having decreased your total balance. Another mistake that people often make is cancelling an old credit card. You should not do this on a whim because maintaining a long history of regular payments can help to boost your credit score.

If you want to cancel a card because you don’t use it anymore or because its annual fee is very high, you should first think through all the implications of your decision. Cancelling your oldest card or one that has a high credit limit may not be the best decision. Bear in mind that once you cancel a card, you cannot reactivate it.

If you have decided to get rid of a card that does not really carry any benefits that you can utilise, it may be a good idea to find a replacement. There are several cards that have generous reward programs, as well as cards that require no annual fee that might better fit your needs.

Text: Duckju Kang/ValueChampion

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