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Closing a credit card account with an outstanding balance is a decision that should not be made lightly. While it may seem like an easy way to simplify your finances or stop overspending, there are several important factors to consider first. Understanding the potential impacts can help you make the right choice for your situation.
You Remain Responsible for the Debt
The most crucial point to know is that closing a credit card does not erase the balance you owe. When you close an account, the remaining balance does not magically disappear. You are still legally obligated to repay the debt according to the original terms of your cardholder agreement.
The credit card company will continue sending you monthly statements detailing the remaining balance, interest charges, minimum payment due, and payment due date Failure to make payments could result in late fees, penalty APRs, and damage to your credit scores.
Interest Keeps Accruing
In most cases, interest will continue accruing on the outstanding balance even after the account is closed. This includes residual interest, meaning interest that accrues between billing cycles.
For example, if you close your account mid-cycle with a $1,000 balance at a 19% APR, that balance will keep accumulating interest daily until it is paid in full. By the next statement, you could owe over $1,019 due to about 30 days of compounding interest charges.
The only potential exception is if you close an account that has a 0% promotional APR. In that case, new purchases would not accrue interest after closure. But you’d still owe the principal balance.
Your Credit Scores May Be Impacted
Closing a credit card account in good standing generally won’t hurt your credit scores. In fact, it could actually help in some cases by lowering your overall credit utilization ratio.
However, closing an account with a maxed out balance could negatively affect your credit scores. Here are two key factors to keep in mind:
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Credit History Length: Closing your oldest or longest-held credit card account reduces the average age of your credit history. This factor makes up about 15% of a FICO credit score.
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Credit Utilization Ratio: Maxing out a card before closure increases your overall credit utilization, which makes up 30% of a FICO score. This measures how much of your total credit limit you are using.
That said, any late payments or other derogatory marks on the account will remain for up to 7 years either way.
You Lose Cardholder Benefits
Once you close a credit card account, you immediately lose access to any perks and benefits associated with that card. This may include:
- Rewards programs
- Sign-up bonuses
- Travel and purchase protections
- Extended warranty coverage
- Rental car insurance
- Roadside assistance
- Concierge service
You also forfeit any unused rewards or points you’ve earned if you close the account before redeeming them. Some issuers give you a short time to redeem rewards after closure, but policies vary.
You Have Less Available Credit
Closing a credit card account also permanently lowers your total credit limit across all accounts. This essentially takes away a layer of financial flexibility and emergency borrowing power.
Having access to revolving credit lines is important for covering unexpected expenses or income disruptions. Eliminating an account’s limit reduces your flexibility and credit options.
When Is Closure a Good Idea?
While the potential drawbacks make closure inadvisable in many cases, there are some situations where it does make sense:
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You’re seeking to stop overspending or a cycle of debt. Removing the temptation to overspend can help break bad habits.
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You want to avoid an annual fee. If the account charges a fee you no longer want to pay, closure stops those charges.
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You have multiple accounts. The impacts may be less noticeable if you already have other open accounts in good standing.
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The account has predatory terms. Accounts with very high rates or fees can sometimes be smart to close.
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You opened it impulsively. If you really did not need the account, closure simplifies things.
Strategies for Handling Closure
If you do opt to close an account with a balance, here are some tips to make the process smoother:
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Pay down the balance as much as possible first to minimize interest charges.
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Transfer the balance to another card at a lower interest rate if possible. Apply for 0% balance transfer offers.
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Set up autopay from your bank to avoid missed payments and credit damage after closure.
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Contact the issuer to redeem any rewards or miles before account closure.
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Keep the card account open but stop using it if you mainly want to avoid future charges.
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Review your credit reports to ensure the account is properly updated, not delinquent.
The Bottom Line
Thinking through the implications before closing a credit card account with a balance is crucial. In many cases, it makes more sense to pay off the card in full while keeping it open or just refrain from using it further. But outright closure may be the right option depending on your financial situation. Either way, be sure you have a repayment plan in place so you can eliminate the debt responsibly.
Pros and cons of closing a credit card with a balance
Your personal financial situation will ultimately decide the best move for you, and that could be closing a credit card regardless of the potential impacts on your credit score. For instance, if you keep using a credit card to get into financial trouble and you’re desperate to break the cycle, closing a card with a balance may be the best step.
Before you move forward, consider the potential advantages and disadvantages of closing a credit card with a balance:
- You’d avoid paying an annual fee. Closing a credit card can help you avoid paying an upcoming annual fee, which you may not want to pay if you’re no longer getting enough value out of the card.
- You can end the temptation to spend. Closing a card makes it impossible to rack up new credit card balances on that particular card.
- You can simplify your financial life. Closing a credit card can make your financial life simpler since you’ll no longer have the option to use that card, and you won’t have to make monthly payments toward it.
- You can damage your credit score. Closing a card can reduce the length of your credit history and increase your credit utilization, both of which can hurt your credit.
- You’d lose out on cardholder benefits. Closing a card means you no longer have access to perks you had before, which could include consumer protections, complimentary insurance or travel benefits.
- You’d limit your credit options for emergencies. Keeping a card open means you have access to a line of credit for emergencies, whereas closing it means you cannot use it if you need it.
What happens if you close a credit card with a balance
When you close a credit card and you still owe a balance, the debt you owe doesn’t go away. The card agreement still applies, and you are still legally responsible for repayment. The following will also go on as normal:
- You’ll continue receiving credit card statements in the mail. You’ll get the typical credit card statement in the mail every month as long as you owe a balance, and you’ll still owe at least the minimum payment required on your credit card each month.
- Your credit card balance accrues interest as usual. Your credit card balance will continue accruing interest (including residual interest) until your balance has been paid in full. Since credit card interest rates are typically variable, your rate can also change over time. Issuers don’t need to notify you in advance if they raise your interest rate as a result of changes in the Federal Reserve’s target interest rate. However, your credit card company is generally legally required to send you a notice 45 days before it can increase your interest rate.
That said, credit card issuers cannot increase your annual fee or charge you new fees after you close a credit card. Closing a card with a balance can also help you avoid paying the annual fee for a credit card you’re no longer using (if the card you’re closing charges one).
Closing A Credit Card With A Balance | What Could Happen?
FAQ
What happens if a credit card closes your account with a balance?
Should I pay off a credit card that is closed?
Many consumers mistakenly believe that once a credit card is closed, they’re no longer responsible for the remaining debt. However, this is not the case. Regardless of why your account was closed, you’ll need to pay any balance you owe.
What happens if you cancel a credit card with an outstanding balance?
The Consumer Financial Protection Bureau (CFPB) explains that you remain responsible for outstanding credit card balances even after you’ve closed an account. That doesn’t mean there’s never a good reason to close an account you haven’t yet paid off. Canceling your account renders your card unusable.
What happens if I have a negative balance on my closed credit card?
Negative balances can result from refunds, statement credits or autopay settings. If a credit card account with a negative balance is closed, the issuer will typically refund the money before closing the account.