This article originally appeared on ValuePenguin

Banks regularly introduce new variants of credit cards with enticing features, like waived annual fees or S$100 in welcome bonus cash rebate. If you keep taking up some of these offers, you may soon end up with more cards than you need or can handle. For one, keeping track of multiple cards can be very difficult, with different billing dates that you need to be aware of. Even if you are able to do so, having too many credit cards may be detrimental to a healthy spending habit as you find yourself scrambling to meet different minimum spending requirements every month.

At some point, you could realise that you have too many cards and that you want to get rid of one or more of them. Whatever, the reason, you should always remember that canceling a card is not just a matter of cutting it into two and sending a cancellation request to your bank. There are more than meets the eye to cancelling a card that could have implications on your life. Here, we discuss some of the most important precautions you can take to save yourself some money and a great deal of psychological pain if and when you need to cancel a card or two.

1. Pay off your balance

First and foremost, you should always pay off the dues that you have accumulated on your credit card before cancelling it. That’s not just the amount that appears on your last credit card statement. There are also the “pending” due amounts that you have spent during the current billing period that have are due to appear in your next month’s 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. Therefore, they are 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 card immediately.

Furthermore, some banks continue to levy charges on 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.

2. Have a credit balance? Here’s how to get it back

The correct way to withdraw a credit balance in your card 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 6%. Instead, you can simply request the bank to issue a check to receive any credit balance you may have left on your card.

3. Redeem your miles and points

In the hurry to cancel a card, some individuals put off redeeming their points or miles till later. However, the problem is that card issuers will forfeit the points that you have accumulated 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 to be worth thousands of dollars or more. It would be a waste to lose out on these.

Therefore, 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 this, you will avoid the bother of having to convince the bank to reinstate your points.

4. Alter billing instructions

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 a different card right away.

5. Cancelling your card could damage your credit score

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 limit will go up. This could affect your credit rating adversely.

Source – Credit Bureau of Singapore

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 on balance on both cards, the below shows what your credit utilisation could look like before you cancel card 1.

Card LimitCredit UtilisationUtilisation Percentage
Card 1S$5,000NILNIL
Card 2S$7,000S$2,00029%
TotalS$12,000S$2,00017%

If you cancel your 1st credit card in this scenario, your credit utilisation shoots up from 17% to 29%, a factor that could lower your credit score. Another mistake that people 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.

Card LimitCredit UtilisationUtilisation Percentage
Card 1NILNILNIL
Card 2S$7,000S$2,00029%
TotalS$7,000S$2,00029%

Don’t decide in haste

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 that you can make. 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.

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