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Expert Q&A: The Impact of a Closed Credit Card

 
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July 25, 2011
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QDear Erica,
I’m thinking of canceling my credit card, but I need to know what will happen if I do. Are they going to raise my payment until it is paid off (I currently owe approximately $13k), or can I just continue paying the same minimum payment I have have been paying? What else do they do when you cancel a credit card? Will my APR go up? It’s already at what I would call the maximum — 29 percent. Honestly, I just don’t want it anymore. — Alexandra

ADear Alexandra,
What, really, do you not want any longer — the piece of plastic itself or the debt that you have on it? I’d guess that it’s the expensive balance that you’re truly sick of. And I can see why. It’s big and expensive.

But here are your answers about what can and will happen if you close your credit card account:

Will they increase the minimum expected payment? No. Whatever formula your credit card company is using to set the minimum payment amount will continue to be used. It will not edge higher if the account is no longer active. Ask Erica

Will your APR go up? A credit card company does have the right to increase or decrease your interest rate based on how you’ve been using the card. For example, if you’ve been late on a payment or have exceeded your credit limit, they can penalize you by charging a higher APR. They can also decrease that rate if you’ve become a better credit customer. However, deactivating the card is not typically a reason to move the rate in either direction.

What else will they do if you cancel? Well, they won’t let you use the card anymore, of course, but beyond that the company will notify the credit bureaus that the account is now closed. This action will have an impact on your credit report and scores. While the report will indicate that the account was “closed by consumer,” which is better than had the creditor itself shut the account down, it may cause your credit score to take a little dip if you’ve had the card for a few years. 15 percent of a FICO score factors in the length of your credit history and this falls into that category. Keeping accounts for a long time and using them well works to your scoring advantage.

If making sure you can’t charge with it anymore will help you make the commitment to debt repayment, I say go for it. Contact the credit card company and explain that you’d like to close your account. They may try to talk you out of it. Maybe they will offer you a lower APR if you keep it open, and if they do, I’d take the offer. The less you pay in interest, the more of your payment will go to to the principal.

After the preceding responses, you should be aware that closing the card won’t do many positive or negative things to you. This doesn’t mean, however, that I think that keeping that account alive is crucial. While it may ding your credit rating, I wouldn’t be surprised if it has already suffered. Your higher than average APR indicates that you may have paid late or overcharged, and that has a far bigger impact on your credit than anything else.

Whatever you do, Alexandra, formulate a fixed payment plan where you pay as much as possible to the debt every month. If you were to just pay the minimum amount (of around 3 percent of the balance), it would take you 44 years to be debt-free! On the other hand, if you paid a steady sum of $500, you’d be in the clear in just over three years.


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