Is it possible to close a credit card with a balance

You can indeed close a credit card that still has a balance, but it’s very important that you keep making payments – at least the minimum – until the card is paid off.

One of the most important factors that affects your credit score is your credit utilization rate, or how much of your existing credit you have used.

This factor is second only to payment history in importance to your FICO score. For VantageScore, this factor carries even more weight – VantageScore calls it “extremely influential.” Even if the account has been closed, credit usage (along with other factors that affect your credit score) still plays a role.

What happens to your balance after closing a credit card?

When you close a credit card that has a balance, that balance doesn’t just disappear—you still have to pay it off. Keep in mind that interest will continue to accrue, so it’s a good idea to pay more than the minimum each billing period.

Also, when you close your card, it can damage your credit history, especially if you have the card for a long time. Closing a long-term card will reduce your average credit age, which is 15 percent of your FICO score.

If you have other cards with balances on them, this can also increase your credit usage, which is 30 percent of your FICO score. If you want to calculate your loan utilization rate, use this handy calculator.

If you close the map, keep in mind that you will most likely lose all the rewards you have earned. Make sure you redeem these rewards before closing your account, and if you have a good amount of cash to pay off, consider using them as a credit statement.

How a closed credit card with a balance affects your credit score

When you close a card, it lowers the average age of your accounts on your credit report, which can hurt your score, especially if it’s an account you’ve had for a long time.

In addition, once an account is closed, any available credit in the account at the time of closure is no longer available to you and your account may also be affected. Since you no longer have access to the account, it may appear that the closed account is being fully used. But it’s not that easy.

Credit scoring is complicated

While the credit scoring factors (payment history, credit usage, credit age, credit set, new credit) seem fairly simple, the science behind credit scoring is complex. Credit scoring is a risk assessment and forecasting of future defaults. What risk does a new lender take on when they accept you as a new client?

Closed accounts are an example. Accounts are constantly closed for various reasons and can be closed by both the creditor and the user. For example, a lender may close an account due to non-payment or non-use, and a user may close an account because the lender changes terms.

So instead of just calling a closed account 100 percent used, the scoring algorithm will look at what the credit limit was at the time the account was closed because that would give a better risk score, no matter why the account was closed.

If 80 percent of the line of credit was used up when your account closed, debt is still a risk to any lender that is thinking about giving you a new loan. Thus, it will be valued lower than if the balance was a smaller percentage of your limit.

Payment history matters too

The use of credit is not the only factor that plays a role here. Payment history is the most influential factor in the FICO score and has a moderate impact on the VantageScore model. So, for example, if the account was closed for non-payment, it will greatly affect your credit score.

The opposite is true if the account was closed by the user due to a change in terms – if the payments were made on time and as agreed, this would be reflected positively even if the account is now closed.

However, for many, accounts with a poor payment history are closed, and this is what causes the most damage to a credit score. A bad payment history is often the result of the credit card in question having a high interest rate, making it difficult to track down. This is especially true if only minimum payments are made. While making your minimum payments on time will help you avoid a bad payment history, it won’t help you get out of debt.

Arrears and write-offs

Arrears that have not reached write-off status (180 days overdue) and are paid off become relevant on your credit report, but are never written off. An unpaid charge becomes a paid charge if it has not been sent to a third-party collector.

A paid write-off is much better for your credit report than an unpaid write-off because it indicates that despite a serious problem, you ended up paying the bill. Everyone has some tough times, but not everyone gets through them and pays their bills. Once paid, you will receive a boost on your credit report and it will be easier for you to get a new loan at a reasonable rate.

Should you keep a credit card account open?

Before you decide to close or keep an account open, please consider the following:

• You may want to leave it open if you plan on making a large purchase soon.
• If you plan to apply for a larger loan in the near future, it makes sense to leave it open.
• If you’re already heavily in debt, leaving your card open may encourage you to take on more.
• If you’re paying a high annual fee and aren’t getting enough benefits from the card to make up for it, it would be wise to shut it down.

If you choose to close the card, you can offset any impact this may have on your credit by paying off balances on other cards you have.

There are many ways to deal with credit card debt, including avalanche and snowball methods, and debt consolidation (one strategy for this might be getting a balance transfer card).

bottom line

Now that you know you’re going to lose points on your hole card debt, make a plan to pay it off. This is especially important to do before you decide to add a new credit to your file. Applying for a loan and making a complex request will temporarily lower your score. You don’t want to add insult to injury by applying too early and getting rejected because a closed negative account still lowers your score.

Steve Bucci has been helping people decipher and solve personal finance issues for over 20 years. He is the author of The Dummies’ Credit Management Kit, The Dummies’ Credit Repair Kit, Barnes and Noble Debt Management, co-author of The Dummies’ All-In-One Money Management Kit, and The Credit Repair Kit. For Dummies (Australia). Steve is an experienced expert witness in identity theft, credit scoring and debt cases. He has been a speaker at the FICO InterACT Global Conference, the Federal Reserve and the International Credit Symposium at the University of Cambridge in the UK.