Understanding the Difference Between Blocking and Deactivating a Credit Card
The process of canceling a credit card might seem unnecessarily long and complicated. While blocking or deactivating a credit card are both options available to consumers, they serve different purposes and have different impacts. Here's a closer look at what each option entails and the reasons behind the lengthy procedures associated with cancellation.
What is the Difference Between Blocking and Deactivating a Credit Card?
Yes, there is a significant difference between blocking a credit card and deactivating it.
Blocking a Credit Card
Temporary Action: Blocking a credit card typically means that you are temporarily preventing any transactions from occurring on that card. You can usually unblock it later if you wish to continue using it.
Security Measure: This is often used if you suspect that your card has been lost or stolen, allowing you to protect your account without permanently closing it.
Deactivating a Credit Card
Permanent Action: Deactivating or canceling a credit card means that you are closing the account entirely. This action is irreversible and you will no longer be able to use that card for any transactions.
Impact on Credit Score: Canceling a card can affect your credit score, especially if it is one of your oldest accounts or if it has a high credit limit.
Reasons for Lengthy Cancellation Procedures
There are several reasons why the cancellation process for a credit card can be lengthy and involved.
Security and Verification
Credit card companies often have lengthy procedures to ensure that the request is legitimate and to prevent fraud. These might include fraud detection systems and verification processes.
Account Information
The company may need to discuss and resolve any outstanding balances, rewards points, or other account-related issues before entirely closing the account.
Banking Retention Efforts
Companies may use this time to offer you alternatives or incentives to retain the card, potentially extending its useful life for you.
What Happens When You Block or Deactivate Your Credit Card?
Blocking a Credit Card:
Temporary action: Transactions are blocked but the card remains active. Annual fees may still apply.
Useful in case of suspected loss or theft to prevent unauthorized use while keeping the card actionable later.
Deactivating a Credit Card:
Permanent action: The card is placed in a dormant state and cannot be used for any transactions.
Bank will allow this only if all dues are cleared.
How Can Credit Card Cancellation Affect Your Credit Score?
Cancelling a credit card can have a substantial impact on your credit score, particularly if you have multiple cards. Here’s how:
Credit Utilization Rate
When you cancel a card, the overall credit utilization ratio can increase, as there are fewer credit lines available. This is seen as a negative credit behavior and can lead to a reduction in your credit score.
Credit bureaus calculate the utilization ratio by adding the balances of all the cards and dividing the resultant sum by the number of cards. With a cancellation, the overall utilization rate is likely to rise, leading to a drop in your credit score.
In conclusion, if you need to temporarily halt transactions, blocking is the better option. However, if you are sure you want to end your relationship with the credit card issuer, deactivating is necessary, though it is a more involved process.