You own a few credit cards, but you have favourites too. You use only a couple of specific credit cards for any expense. The remaining credit cards just lie in your wallet. You use those cards rarely.
In that case, how long can you keep your credit card active without any usage? What do the RBI rules say in this matter? What should you do with unused credit cards? What are the pros and cons of credit card closure?
What Happens if You Do Not Use Your Credit Card?
As per RBI Master Directions-Credit Card and Debit card-Issuance and Conduct Directions, 2022, if you do not use your credit card for over a year, the bank must initiate the process to close the card. Firstly, the bank must intimate the card holder about the impending closure.
If you want to retain the card, you can simply ask the bank to NOT cancel the card. However, if you ignore such a message, your card will be automatically cancelled by the bank after 30 days unless you have dues pending. If you have a credit balance, the bank will transfer the amount to your credit card before closing the card.
As I understand, various bank charges (annual fee), EMI payments do not count towards credit card usage for this purpose. You must have actively used the credit card over the past 12 months to avoid initiation of closure process.
Also, note that you always have an option to cancel credit card whenever you want. The aforementioned RBI master directions also provide that any request for closure of a credit card must be honoured by the bank within 7 days of receipt of such request provided there are no outstanding dues. In fact, if the bank does not close the card within 7 days, it must pay a penalty of Rs 500 per day for each day of delay.
Hence, if you keep the card without using it, you can keep the card for as long as you want. However, you must keep declining closure requests from the bank. Please understand it is possible that the bank may withdraw the credit card offered to you if you don’t use it (because an unused credit card is no use to them), but that’s a different matter.
What Are the Pros and Cons of Cancelling a Credit Card?
The lower the number of credit cards, the easier it is to manage those cards. You have to keep track of lesser number of payment dates. You also have a better sense of how much you are spending. This alone brings in spending discipline.
Additionally, unused cards also pose financial security risks too. You may not even notice if an infrequently used credit card is missing. You may not even keep the card in the wallet and leave at home, making it prone to getting misplaced.
On the other hand, when you cancel a credit card, you lose all the reward points that you had accumulated. However, it must be noted that you wouldn’t accumulate too many reward points for the cards you don’t even use. Moreover, you can always utilise the rewards before cancelling the card.
More importantly, when you cancel a credit card, your overall credit limit across the banking system goes down. Everything else being the same, your credit utilisation ratio will go up. Credit utilisation ratio = Total outstanding balance/Credit limit.
A credit utilisation ratio of under 30% is considered good. Lower the better. A high credit utilisation ratio can affect your credit score adversely.
If you close a credit card, the denominator will go down, which will increase the utilisation ratio. If you have been using your remaining credit cards extensively (and with high utilisation), then closing an unused card may affect your credit score. Hence, do keep this aspect this mind.
Do you have any credit cards that you rarely use? If yes, do you plan to cancel those cards? Let me know in the comments section.