Author: Brian O’Connell
Fact Checked By: Paul Rose Jr
Edited By: Chantile Ferriera
At $17.69 trillion in the first quarter of 2024, United States consumer credit card debt is at its highest level ever recorded by the Federal Reserve Bank of New York.
Per household, that amounts to about $10,848 — only $1,577 shy of the WalletHub Credit Card Debt Study’s record, in the fourth quarter of 2007. High credit card debt might tempt cardholders to close their accounts, even if they carry a substantial outstanding balance.
Hold the phone.
“Closing a credit card with a[n outstanding] balance is the worst thing you can do,” says Howard Dvorkin, a certified public accountant and chairman at Debt.com in Ft. Lauderdale, Florida. “It hurts you in so many ways and helps you in none.”
Dvorkin says his clients often want to close their cards for good reasons, but they are misguided. “They know they overspend, and they just want to resist the temptation to do it again,” he notes. “So they indiscriminately close all their credit cards.”
But that step, despite their best intentions, won’t be the elegant solution they expect.
Take These Steps to Close Your “With Balance” Credit Card Correctly
The good news is that with a solid grip on the numbers and a determination to curb debt, you can close a credit card with a balance, but it’s not easy. Take these tips into consideration before you tackle closing those credit cards.
Know the Lay of the Land
Closing any credit card with an existing balance is tough, but it’s especially difficult if you’ve maxed out your available credit.
“Unfortunately, that’s happening much more often these days,” Dvorkin says. “Debt.com recently surveyed 1,000 adults, and one in three said they’ve maxed out their credit cards in recent years. Another one in five cardholders reported having at least $10,000 to $20,000 of credit card debt.”
Many of these people may figure, “What have I got to lose by closing out a card?”
“Turns out a lot,” Dvorkin notes.
“The problem is, closing a credit card doesn’t get rid of the balance,” he explains. “You still owe what you charged. Even worse, your credit score can drop, especially if you’ve had that card a long time — 15% of your credit score is based on ‘credit history’ because lenders like it when you have a long-term relationship with your credit cards.”
By closing a credit card, you’re also skewing your credit utilization ratio.
“Simply put, 30% of your credit score is how much you owe on your debts, and a big part of that is how much of your available credit you use,” Dvorkin adds. “Closing a credit card means you lose that credit limit. Now you owe the same amount, but you’re closer to maxing out what you can charge.”
That doesn’t even take into account potential added fees if the minimum payment you can afford is smaller than the interest added each month.
Getting a grip on the issues above is job number one for cardholders looking for an exit ramp. Knowing where you stand with your credit card balance gives you a starting point for closing the card.
Stop Using the Card
Next, stop using the card for new purchases.
“As long as the card accumulates interest, it could remain negative for years,” says Erika Kullberg, an attorney specializing in small business and money management services based in Sheridan, Wyoming. “Instead, once the balance is stripped down as far as it can go, call the credit card issuer and ask them to shutter the card.”
Start Attacking the Balance
Do whatever you can to cut that credit card balance down in size. Cut your household budget elsewhere and use the extra money to double down on your credit card debt. Or, take on side gig work and use the cash for the same goal.
Once the debt is down significantly, contact the credit card company and ask if you can close the account and work out a payback agreement on any remaining balance. If the debt is down to 10% or 20% of the card’s credit limit, you’ll have a good chance of cutting a deal. If it’s significantly higher, expect the card carrier to reject the request until you reduce the credit card debt to 25% or less. That’s usually a number card carriers can work with.
“You might be asked to pay the remaining balance immediately or enter into a payment plan, but at least you will no longer have to deal with accruing interest,” Kullberg says. “If the card issuer agrees to close the account, confirm the closure and reconcile your account with the card issuer. Monitor your credit reports regularly to ensure the account is listed as closed with a zero balance.”
Ask for a “Switch”
Length of credit is also an important factor in credit score, so try to avoid closing your oldest accounts and focus on the accounts with the lowest balance and shortest timespan.
“If you want to close a credit card account because of the fee, it may be worth talking to the credit card company to see if you can switch to a different card with a lower fee while keeping the same account open,” says Todd Stearn, founder, and CEO of The Money Manual, a digital personal finance management platform.
Watch for Possible Fees
Some credit cards may charge an annual fee, especially if they offer rewards or benefits.
“Before closing the account, make sure to use any remaining rewards and weigh the cost of the annual fee against its benefits,” says Sherman Standberry, a licensed CPA and managing partner at My CPA Coach, a tax planning firm in Atlanta, Georgia. “If the fee is too high and not worth it, consider closing the account to avoid future charges.”
Weigh Your Relationship With Your Bank
Closing a bank-sponsored credit card may also impact your relationship with the lending institution.
“If you have other accounts or loans with the same bank, they may see you as less profitable if you close a credit card account,” Standberry says. “This could affect your chances of getting approved for future loans or accounts with the bank. Weigh this factor before closing a credit card, especially if you have a long history with the bank.”
Don’t Take Anything for Granted
One common mistake credit card consumers make with closing scenarios is not verifying whether their account is closed.
“Without written confirmation, you may continue accumulating fees or penalties unknowingly,” says Jonathan Feniak, general counsel and head of finance at San Juan, Puerto Rico-based Company Sage. “Another severe oversight is neglecting any residual balance repayments post-closure, leading to debt escalation.”
Consequently, paying attention to those payments is essential even after you’ve decided to close the account. “As with everything financial, proactive and responsible behavior can make all the difference,” Feniak says.
Get Professional Assistance
Dvorkin says he “never, ever” advises closing a credit card with a balance until you consult a professional.
“That’s like saying, ‘I can’t afford to pay my rent or mortgage, so I’ll just move out,’” he says. “Doing so won’t solve the problem. You need to consult an experienced money management professional. You’ll receive a free debt analysis and options for better ways to handle a highly delicate situation there.”
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This post was previously published on Wealth of Geeks.
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