What to know before closing a credit card with a balance

You can close a credit card while it still has a balance, but there are very few situations where that makes sense. When you cancel a credit card, you are still responsible for paying off that debt and your balance will continue to earn interest until you do. Here’s everything you need to know about closing a credit card before you’ve paid off the balance.

What happens when you close a credit card without paying the balance?

Closing your credit card account does not remove the debt, nor does it break the link to your credit report. The biggest change will be that you will no longer be able to use your card.

What remains the same:

  • The debt belongs to you and it will appear on your credit report.
  • The credit card issuer will continue to send you monthly statements for the amount you owe.
  • Interest will continue to accrue monthly.
  • If you make minimum payments on your debt each month, your account can stay in good standing.
  • If you stop making payments, you might see additional charges and your issuer will likely report a default to all three credit bureaus. After that, your credit score will drop.

What changes:

  • You will no longer be able to use your credit card to make purchases.
  • You may not have to pay the annual fee.

How closing a credit card with a balance will impact your credit

Closing a credit card (whether or not you paid off the balance) can impact your credit utilization rate. This ratio represents the amount of credit you are using compared to your total credit limit. If your credit utilization ratio is high, it can affect your credit score.

For example, suppose you have two credit cards, each with a limit of $5,000. Card one has a balance of $5,000, while card two has a balance of $0. Your credit utilization rate is 50% ($5,000/$10,000). If you close card two, your credit utilization ratio increases to 100% ($5,000/$5,000), which may negatively impact your score. This can hurt you even more if you plan to take on a large debt in the future, such as a car loan or mortgage.

A change in your credit usage should be the only major impact on your credit if you close the account, but continue to make at least the minimum payments until your debt is exhausted. If you close the account and don’t make payments, your credit score will drop as it would after late payments on any account.

When it makes sense to close a credit card before paying off the balance

Knowing that canceling your credit card doesn’t eliminate your debt, why would you? Preventing you from using your credit card can be beneficial in certain situations:

You want to avoid increasing your debt. You can’t have credit card debt without a credit card, so if you’re worried about accidentally spending too much, it might be a good idea to close your account as soon as possible so that your only choice is debit.

You want to avoid an annual fee. You’ve stopped using the card and are only working on paying off the balance, but it’s time to pay that annual fee again. You’ll want to check with your issuer first, but canceling the card may exempt you from paying the annual fee, even if you have a balance left.

Alternatives to closing a credit card with a balance

If you don’t want to close your account, you can try several alternatives. These include:

Pay your debt, then cancel

Things can get complicated if you cancel your card while it still has a balance. Maybe your automatic payment stops, or maybe your mobile app isn’t as easy to navigate. If you’re not running away from impending annual fees or the urge to overspend, it’s probably easier to pay off credit card debt then cancel.

Negotiate the terms of your account

Depending on why you want to close the account, it might be a good idea to contact your credit card issuer and explain your situation. By negotiating with your credit card issuer, you may get lower minimum payments, waived fees, or a reduced APR. This is easier to do if you have a good history of paying on time.

Switch to a card with no annual fee

Annual fees are one reason you might want to cancel your credit card, but did you know there’s another option? Many credit card issuers allow cardholders to do what is called a product switch. This is where you switch to another credit card, but keep the same account. Generally, you do not need to reapply for the new card. This way you can avoid the annual fee without canceling

Transfer your balance

If you are considering closing the account to get rid of debt, consider a balance transfer. This is a debt elimination strategy that can give you over a year to focus on paying off your balance, without accruing interest.

Reserve the card for emergencies

If you don’t think you can avoid overspending unless you close the account, close the account by all means. But if you can leave the card hidden for emergency use only, you can avoid the credit crunch that comes with closing a credit card. It only works if you’re honest with yourself about what you’re ready for.

The bottom line

Closing a credit card is not a way to get out of debt without paying. The credit card issuer will continue to send you monthly statements and interest will continue to accrue. If you make payments on time each month, your account may stay in good standing, but if you stop making payments, you could see additional charges and your issuer will likely report a default to all three credit bureaus.

Closing a credit card can impact your credit utilization rate and credit score. If you don’t want to close your account, there are several alternatives you can try, such as negotiating a lower interest rate or annual fee, switching to a card with no annual fee, or keeping the card only for emergencies.

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