 "Improper closure can cause more problems")
Opening a bank account or getting a credit card may be difficult. However, closing an account or surrendering a credit card could be equally tough, if not more. If you think it is enough to leave a bank account unclaimed or a credit card unused, think again. This could impact your credit history. Also, your account could be used for frauds.
Closing a bank account
If you have switched jobs and transferred your salary account to another bank, it is advisable to close your previous account. Most banks charge a fee for closing an account. The fee varies from bank to bank and depends on the kind of account---whether it is a salary account or a savings bank account.
While closing a bank account, you have to surrender unused cheque leaves. If a credit card is linked to that account, you have to surrender that, too. In case there are loan payments linked to the account and payments are pending, it is possible the bank may not allow closure of the account.
Even if there is no money in your account, you can't leave it unused. A salary account loses its status once the accountholder changes the job; it becomes an ordinary savings bank account that requires a minimum balance. If this balance is not maintained, the bank could keep charging a fee for it. If you don't close the account, you may find yourself owing the bank a tidy sum.
Often, letters to accountholders informing them of negative account balances are auto-generated. "Such letters are issued because the bank doesn't know the account is not being used. In such a case, it is best to inform the bank that you are not using the account," says the head (consumer banking) of a foreign bank. While it isn't possible to recover money from deposit holders, if money is deposited in the account in the future, the bank may deduct its fees from this amount, he adds.
To close a bank account, you must either write a letter to the bank or fill an application form (if the bank has one) and seek closure. Any balance would be paid either in cash or through a demand draft.
Surrendering a credit card
While surrendering a credit card, it is vital to get an acknowledgment from the bank. Merely cutting the card into pieces and mailing it to the bank may not be sufficient. "It may happen a renewal fee is charged on the card and it shows as unpaid dues, though the card holder is not using it. So, you can insist for a letter from the bank," says S Kalyanaraman, general manager (retail banking), Bank of Baroda.
Many a times there could be a pending sum against your credit card even after you have stopped using it, owing to a dispute over, say, wrong billing. Therefore, contact the bank, resolve the dispute and ask the bank officials to issue a letter to that effect.
Unpaid credit card dues could be a hurdle when you apply for loans. In case you have settled your credit card dues and the bank agreed to waive a part of the amount, you might assume the matter is settled. However, it may be reflected as unpaid dues in the bank's books. This would affect the borrower's creditworthiness, as Pramod Mhatre (name changed), a Mumbai-based executive with a software firm, discovered.
When Mhatre applied for a home loan, it was rejected by the housing finance company. Though he was eligible (based on his salary), the company was wary of sanctioning the loan due to his low credit score. Mhatre's credit score was based on a credit card loan he had settled about two to three years ago. Since he had just started working and his salary wasn't substantial, the bank had agreed to waive a part of the huge dues on his credit card; Mhatre had agreed to pay the rest. What he didn't realise was since the amount was waived, his account was considered active, not repaid in full. This was the record with the credit bureau, a record other banks had access to. Therefore, Mhatre continues to be considered a defaulter.
Therefore, it is important for borrowers to follow up with the lender and ensure closure of old dues, says Mohan Jayaraman, managing director, Experian Credit Information Company.
Closing a loan
"In case of a settlement, it is important for borrowers to know how the loan has been treated. They must ask whether it would be considered a waiver, as a settlement is considered more negative than a loan repaid in full, but more positive than a default," Jayaraman says.
In a settlement, both parties (bank and borrower) could agree a certain amount would be repaid. In this case, the bank may consider the loan as closed or a write-off (the borrower says he/she can afford to pay only a certain amount and the bank agrees, fearing it wouldn't be able to recover any amount). In such a case, the bank would consider the remaining amount as waived. This is how it is recorded by the credit bureau.
Banks opt for the settlement method in cases where the interest is high and, therefore, the unpaid amount increases over time. In such a case, the bank does not lose much. But for loans where payments are made in instalments, the bank may agree to waive a part of the amount if it gets some money. How the bank classifies the loan depends on the kind of loan, the bank's policy and its accounting practices. According to V N Kulkarni, counsellor with a credit counselling centre Abhay, unless a borrower asks for it, banks don't issue a letter about the dues being cleared. So, ensure you ask for one. You may find it difficult to get a loan within one to two years of your loan being waived, as is the case with Mhatre. But after about three years, the process could be easier. So, the best option for someone like Mhatre would be to wait for a couple of years.
K V S Manian, head (consumer banking), Kotak Mahindra Bank, agrees. "As data with the credit bureau ages, the weightage of the data would go down. The borrower is given time to reform and build his or her credit record," he says. For partial payments, banks reserve their right to collect; they wouldn't show this as something they want to give up. So, if your loan is repaid, ensure you get a letter from your bank acknowledging this. Also, preserve the letter.
Insurance policy
For insurance policies, if you have decided to let these lapse, ensure you claim the applicable surrender value. Else, get a letter from the insurance company saying the policy has been closed, and preserve that document. The latter is vital if the policy does not reach a surrender value; otherwise, the policy could be sold to someone else for premiums. However, the policy would continue to be in the name of the original holder. The fraudulent person stands to earn on two accounts. First, if the original policyholder dies, he would get the entire sum assured, thereby turning his money into 'white money'. Or, when the policy matures, he would get the entire amount in 'white money'. However, there might be a problem if the original policyholder wants to revive the policy.
TIPS ON CLOSURES
When closing a bank account:
When surrendering a credit card:
When surrendering an insurance policy
Charges for closing your savings bank account:
According to BankBaazar.com, there are no closure charges for salary and savings accounts. However, while you don't need to maintain a particular balance for a salary account, this isn't the case for savings accounts. Also, if a savings account is closed within a year of it being opened, it would attract a charge. Therefore, if you wish to close an idle account, you would have to pay the charge for not maintaining the minimum balance during the idle period. This varies according to circumstances.
A look at the charges for closing a savings account if minimum balance hasn't been maintained:
HDFC Bank
Up to 14 days- Nil
15 days to 12 months- Rs 500
Beyond 12 months- Nil
ICICI Bank
Up to 30 days - Nil
31 days to a year- Rs 500
Beyond a year-Nil
HSBC Bank
If the account is closed within six months, the charge is Rs 1,000, whether the average minimum balance is aintained or not
Beyond 6 months- Nil
Closing a bank account
If you have switched jobs and transferred your salary account to another bank, it is advisable to close your previous account. Most banks charge a fee for closing an account. The fee varies from bank to bank and depends on the kind of account---whether it is a salary account or a savings bank account.
While closing a bank account, you have to surrender unused cheque leaves. If a credit card is linked to that account, you have to surrender that, too. In case there are loan payments linked to the account and payments are pending, it is possible the bank may not allow closure of the account.
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Even if there is no money in your account, you can't leave it unused. A salary account loses its status once the accountholder changes the job; it becomes an ordinary savings bank account that requires a minimum balance. If this balance is not maintained, the bank could keep charging a fee for it. If you don't close the account, you may find yourself owing the bank a tidy sum.
Often, letters to accountholders informing them of negative account balances are auto-generated. "Such letters are issued because the bank doesn't know the account is not being used. In such a case, it is best to inform the bank that you are not using the account," says the head (consumer banking) of a foreign bank. While it isn't possible to recover money from deposit holders, if money is deposited in the account in the future, the bank may deduct its fees from this amount, he adds.
To close a bank account, you must either write a letter to the bank or fill an application form (if the bank has one) and seek closure. Any balance would be paid either in cash or through a demand draft.
Surrendering a credit card
While surrendering a credit card, it is vital to get an acknowledgment from the bank. Merely cutting the card into pieces and mailing it to the bank may not be sufficient. "It may happen a renewal fee is charged on the card and it shows as unpaid dues, though the card holder is not using it. So, you can insist for a letter from the bank," says S Kalyanaraman, general manager (retail banking), Bank of Baroda.
Many a times there could be a pending sum against your credit card even after you have stopped using it, owing to a dispute over, say, wrong billing. Therefore, contact the bank, resolve the dispute and ask the bank officials to issue a letter to that effect.
Unpaid credit card dues could be a hurdle when you apply for loans. In case you have settled your credit card dues and the bank agreed to waive a part of the amount, you might assume the matter is settled. However, it may be reflected as unpaid dues in the bank's books. This would affect the borrower's creditworthiness, as Pramod Mhatre (name changed), a Mumbai-based executive with a software firm, discovered.
When Mhatre applied for a home loan, it was rejected by the housing finance company. Though he was eligible (based on his salary), the company was wary of sanctioning the loan due to his low credit score. Mhatre's credit score was based on a credit card loan he had settled about two to three years ago. Since he had just started working and his salary wasn't substantial, the bank had agreed to waive a part of the huge dues on his credit card; Mhatre had agreed to pay the rest. What he didn't realise was since the amount was waived, his account was considered active, not repaid in full. This was the record with the credit bureau, a record other banks had access to. Therefore, Mhatre continues to be considered a defaulter.
Therefore, it is important for borrowers to follow up with the lender and ensure closure of old dues, says Mohan Jayaraman, managing director, Experian Credit Information Company.
Closing a loan
"In case of a settlement, it is important for borrowers to know how the loan has been treated. They must ask whether it would be considered a waiver, as a settlement is considered more negative than a loan repaid in full, but more positive than a default," Jayaraman says.
In a settlement, both parties (bank and borrower) could agree a certain amount would be repaid. In this case, the bank may consider the loan as closed or a write-off (the borrower says he/she can afford to pay only a certain amount and the bank agrees, fearing it wouldn't be able to recover any amount). In such a case, the bank would consider the remaining amount as waived. This is how it is recorded by the credit bureau.
Banks opt for the settlement method in cases where the interest is high and, therefore, the unpaid amount increases over time. In such a case, the bank does not lose much. But for loans where payments are made in instalments, the bank may agree to waive a part of the amount if it gets some money. How the bank classifies the loan depends on the kind of loan, the bank's policy and its accounting practices. According to V N Kulkarni, counsellor with a credit counselling centre Abhay, unless a borrower asks for it, banks don't issue a letter about the dues being cleared. So, ensure you ask for one. You may find it difficult to get a loan within one to two years of your loan being waived, as is the case with Mhatre. But after about three years, the process could be easier. So, the best option for someone like Mhatre would be to wait for a couple of years.
K V S Manian, head (consumer banking), Kotak Mahindra Bank, agrees. "As data with the credit bureau ages, the weightage of the data would go down. The borrower is given time to reform and build his or her credit record," he says. For partial payments, banks reserve their right to collect; they wouldn't show this as something they want to give up. So, if your loan is repaid, ensure you get a letter from your bank acknowledging this. Also, preserve the letter.
Insurance policy
For insurance policies, if you have decided to let these lapse, ensure you claim the applicable surrender value. Else, get a letter from the insurance company saying the policy has been closed, and preserve that document. The latter is vital if the policy does not reach a surrender value; otherwise, the policy could be sold to someone else for premiums. However, the policy would continue to be in the name of the original holder. The fraudulent person stands to earn on two accounts. First, if the original policyholder dies, he would get the entire sum assured, thereby turning his money into 'white money'. Or, when the policy matures, he would get the entire amount in 'white money'. However, there might be a problem if the original policyholder wants to revive the policy.
TIPS ON CLOSURES
When closing a bank account:
- Return the credit card it is linked to
- Return unused cheque leaves
- Ensure there is no pending loan payment linked to it
- Be prepared to pay charges for closing
When surrendering a credit card:
- Insist for a letter from bank to that effect
- Resolve any amount pending due to a dispute
- When closing a loan
- Verify how the bank would treat it -as settlement or a waiver
- Ask for a no-due certificate from bank
- Resolve any amount pending due to a dispute over wrong billing
When surrendering an insurance policy
- Claim the surrender value
- Get a letter from the company saying the policy has been closed and preserve that document
Charges for closing your savings bank account:
According to BankBaazar.com, there are no closure charges for salary and savings accounts. However, while you don't need to maintain a particular balance for a salary account, this isn't the case for savings accounts. Also, if a savings account is closed within a year of it being opened, it would attract a charge. Therefore, if you wish to close an idle account, you would have to pay the charge for not maintaining the minimum balance during the idle period. This varies according to circumstances.
A look at the charges for closing a savings account if minimum balance hasn't been maintained:
HDFC Bank
Up to 14 days- Nil
15 days to 12 months- Rs 500
Beyond 12 months- Nil
ICICI Bank
Up to 30 days - Nil
31 days to a year- Rs 500
Beyond a year-Nil
HSBC Bank
If the account is closed within six months, the charge is Rs 1,000, whether the average minimum balance is aintained or not
Beyond 6 months- Nil