Closing a Credit Card That Still Has a Balance

Cutting up credit card
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If you want, you can close a credit card account that has an outstanding balance. But you will still have to pay off that balance eventually—closing the account doesn't magically make the charges go away—and you will continue to pay monthly interest on the unpaid balance.

It may make sense for you to pay off the credit card or transfer the balance to a different card account before canceling the card. And in some cases, you might want to leave the account open but use it only infrequently.

Two of the main reasons people choose to close a credit card account are to avoid an interest rate increase or stop paying an annual fee. You may also decide to close an account if you are unable to control your spending and want fewer cards that you can max out at your disposal.

Those are all valid reasons, but you should be aware that closing a credit card will have some effect on your credit score. The significance of the effect depends on several factors, including how much available credit you have on other cards and how much you use them.

Contacting Customer Service

If you're thinking of closing a credit card account because of an interest rate increase or an annual fee, the first thing you should do is call customer service. Tell them what you plan to do and ask if they can maintain your existing rate or cancel the fee. The worst thing that can happen is, they'll say no. And if they say yes, you'll be able to continue to benefit from using that card and avoid an impact on your credit score.

Paying Off or Transferring a Balance

Card issuers must give you 45 days' notice before an interest rate hike goes into effect. If the bank declined your request to keep your rate the same, you can use that time to pay off the balance, if you have the money available, or to transfer the balance to a different card. You may then choose to cancel the card or use it only when you know you'll be able to pay off what you've charged during a monthly statement period.

Similarly, you can close the account with the annual fee after you've paid it off or transferred the outstanding balance and before the fee gets charged to your card. The fee may be applied during the month in which you opened the account or at the beginning of the calendar year. You can look at past statements to find out when the fee is levied.

Keep in mind that account closures can be initiated by either party: A bank may choose to cancel your account if you haven't used your card in a while, maybe as short a period as six months.

Credit Score Impact

If the card you're canceling has a high credit limit, your credit utilization ratio—an important factor in determining your credit score—will be negatively affected if you charge a lot and/or maintain high balances on other cards. The credit utilization ratio compares the total amount of credit you have available to the total amount you're using.

The lower your credit utilization ratio, the better your credit score. A ratio below 30 is generally considered to be good.

As an example, let's say you have three credit cards with $10,000 credit limits and you charged a total of $6,000 on them this month. Your credit utilization ratio would be a very respectable 20 percent ($6,000 divided by $30,000 and then multiplied by 100). If you canceled one of the cards and charged the same amount, your ratio would be 30 percent ($6,000 divided by $20,000 and then multiplied by 100), just north of the good range.

To help offset the loss of available credit from the canceled card, you might add a new card—with a lower interest rate and without an annual fee—or ask for a credit increase on an existing card.

You should avoid closing more than one credit card account in a short period of time because multiple cancellations can magnify the impact on your credit score.

Your credit score may also be harmed if the card you're closing was the one you've had the longest, because it will shorten the length of your credit history. The average age of your credit cards is another factor in determining your credit score, though it's less important than the credit utilization ratio.

Loss of Rewards

Once you've canceled your card, you will probably forfeit any rewards, such as cash back or airline miles, you've accumulated. If your card offers reward points, redeem as many of them as you can before canceling it.

Written Confirmation

You should get a written confirmation notice in the mail after you've requested that your credit card be canceled. If you don't hear from the bank within, say, two weeks, follow up with customer service.