credit cards

Does opt-out preserve rates on credit cards?

Leslie McFaddenq_v2.gifDear Credit Card Adviser,
I was reading a Q&A regarding closing credit cards with a balance. In my case, I have a high balance that I am paying monthly, but my credit card company informed me that unless I opt out and close my account, it will raise my interest to 30 percent. I have never missed a payment and was never late, but it apologized for rate hike listing the bad economy as its reason. My question is, if I opt out and close my account, can I continue to pay my balance down monthly? According to its letter to me, if I opt out, my current high balance would be assessed the current interest rate and not the new higher rate. Will my credit score decrease because I closed my account with a balance? Please advise.

Thank you,
-- Heather P.

a_v2.gifDear Heather,
If you opt out of the rate hike, your account will be closed and you can then pay monthly under the current rate. The Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act, of 2009, which became law in May, states that account closure or cancellation by the consumer can't trigger a default on the agreement or immediate repayment of the balance in full. The law also bars issuers from changing the terms of repayment on a closed account unless they either arrange payment over a period of at least five years or charge a minimum payment percentage no more than twice the previous amount. These protections already went into effect Aug. 20; the majority of changes don't take effect until February 2010.

There's no credit score penalty specifically for shutting down an account with a balance. As long as the closed account has a balance, the amount and credit limit will continue to affect your overall utilization, or revolving-debt-to-credit-limit ratio. The lower your utilization, the better.

Once the balance is paid off, however, the credit scoring formula will ignore the account when it calculates your utilization. Because you have less available credit all of a sudden, your utilization could spike and hurt your score. It depends on your other account balances. For example, if you had two cards each with a $1,000 credit limit and owed $600 on one, closing the account with a zero balance would push the overall utilization from 30 percent to 60 percent.

Your score could also take a hit if your credit history shortens. In the FICO scoring model, your length of credit history comprises 15 percent of your score. Your average account age and the age of your oldest account comprise two important measurements in this category. The loss of your oldest card could lower ages and harm your score. That's right, older is better in the credit scoring world. The damage may not occur for some time though, since closed accounts with clean payment histories can stay on a credit report for up to 10 years.

In short, closing the account will preserve your current rate, but possibly increase your debt ratio down the road. Reduce your other credit card balances or ask for credit line increases to lessen the impact to your score.

To ask a question of the Credit Card Adviser, go to the "Ask the Experts" page and select "Credit Cards" as the topic. Read more columns by the Credit Card Adviser.

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