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What to know before closing a credit card with a balance

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

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

Closing your credit card account does not delete the debt, nor does it sever the connection to your credit report. The most significant change will be that you can’t use your card anymore.

What stays the same:

  • The debt is yours, and it will show up on your credit report.
  • The credit card issuer will continue to send you monthly statements for the amount you owe.
  • The interest will continue to accrue every month.
  • If you make minimum payments on your debt each month, your account may remain in good standing.
  • If you stop making payments, you may see additional charges and your issuer will likely report delinquency to the three credit bureaus. After that, your credit score will plummet.

What changes:

  • You won’t be able to use your credit card to make purchases anymore.
  • 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 you’ve paid the balance down to zero or not) can impact your credit utilization ratio. That ratio represents the amount of credit you’re using compared to your total credit limit. If your credit utilization ratio is high, it can ding your credit score.

For example, let’s say you have two credit cards, each with a $5,000 limit. Card one has a balance of $5,000, while card two has a $0 balance. Your credit utilization ratio is 50 percent ($5,000/$10,000). If you close card two, your credit utilization ratio jumps to 100% ($5,000/$5,000), which can negatively impact your score. This can hurt you even more if you’re planning to take out a large debt in the future, like an auto loan or a mortgage.

A change to your credit utilization should be the only major credit impact if you close the account, but continue to make at least the minimum payments until your debt is gone. If you close the account and fail to 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 down the balance

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

You want to avoid adding to your debt. You can’t get into credit card debt without a credit card, so if you’re worried about accidentally overspending, it may make sense to close your account ASAP so that your only choice is debit.

You want to avoid an annual fee. You’ve stopped using the card and are solely working on paying down 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 remaining balance.

Alternatives to closing a credit card with a balance

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

Pay your debt, then cancel

Things can get complicated if you cancel your card while it still has a balance. Maybe your auto-pay stops, or maybe your mobile app isn’t as easy to navigate. If you aren’t running from an impending annual fee or the urge to overspend, it’s probably easier to pay off your credit card debt and then cancel.

Negotiate your account terms

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

Downgrade to a card with no annual fee

An annual fee is 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’s a called a product change. This is where you switch to a different credit card, but keep the same account. Generally, you don’t need to reapply for the new card. This way, you can avoid the annual fee without canceling

Transfer your balance

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

Reserve the card for emergencies

If you don’t think you can avoid overspending unless you close the account, by all means, close the account. But if you’re able to leave the card tucked away for emergency use only, you can avoid the credit hit that comes with closing a credit card. This only works if you’re honest with yourself about what you’re ready for, however.

The bottom line

Closing a credit card isn’t a way to get out of debt without paying. The credit card issuer will continue to send you monthly statements, and the interest will continue to accrue. If you make payments on time each month, your account can remain in good standing, but if you stop making payments, you may see additional charges and your issuer will likely report delinquency to the three credit bureaus.

Closing a credit card can impact your credit utilization ratio and your 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, downgrading to a card with no annual fee or keeping the card for emergencies only.

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