Closing a Credit Card That Still Has a Balance – Due to unforeseen circumstances you may want to close your credit card prematurely.Not that owning a credit card is for a specific time period,but most people use their cards lifelong and often die in debt.However in certain situations it may also be wise to close down a card.Below are some possible reason why you may want to.
Reasons for closing a credit card
annual fees – Most entry level cards that are issued to first time users with low credit limits and lesser privileges do not have annual charges associated with them.They are absolutely free to to use except the finance charges on purchases.However at some point of tiem,the issuer may decide to start charging a flat yearly fee which maybe be minimal in the range of $15 – $20 to use the card.At this time many users opt out of the card.
interest rates – For normal users the APR on credit cards range from 17%-21% and for users with bad credit it may peak at 25%.These are not too bad,considering in developing countries the average APR is 42%.
These rates fluctuate over a course of time,however sometimes the issuer hikes the rate of interest.If you are a heavy user of your card and run up a high balance every month,then this can cause you to pay more finance charges.This is also a reason to shift to a new bank or card issuer.
get out of debt – When working for credit card collections,ive heard many users tell me that once they are done paying up the card in full,they would “take a pair of scissors and cut up the card”.
If you are delinquent on even a single payment,the card issuer will charge you late payment fees,that are pretty high and might even seem unjust.If you receive calls from collection agencies and are way back on payments,its time to stop using credit.Its clear that you just do not have the repayment capability anymore.
When you reach this point,you need to stop using the card and just focus on paying back the balance.
consolidate credit into a single line of credit – When you have more than one card and have outstanding balances on all of them,it sometimes is a good idea to do a balance transfer and consolidate all the balances into just one card.Many banks offer attractive lower balance transfer rates to lure customers into bringing over their credit.
How is this easier? Firstly it is easier to manage debts on one card rather than many.Also transfer the balances to the card that has the least APR and highest credit limit.
Implications of closing a credit card
credit score – there is no direct correlation between closing a card and credit score for the most part.However if you closed the card due to financial restraints like late or missed payments it could be seen as a negative signal to your credit score.This could shed off a few points on your credit score but if you do a balance transfer and make good on those payments,your credit score could bounce back.
credit utilization – One immediate effect that would happen once you close a credit card with balance is that your credit utilization would start to drop over a period of time.This is because the credit utilization is a ratio of credit used to credit limit.Since your monthly dues will continue,and assuming you still pay them off,your balance will decrease every month,without any expenditure.Having a healthy CU is always good.
credit report – Your credit report is prepared every 12 weeks or so.If you close your card with a balance on it,this will be reflected in the report.The higher the balance you had when you closed it,late payments,missed payments and penalties if any will also be shown.If you closed it when it was in good standing then there wont be any negative impact to your credit score,and also this will not be reported to the credit bureaus.
reduce finance charges – This is one of the best outcomes of closing your card with a balance on it.Since the balance will keep reducing after you continue paying off the monthly charges,naturally the finance charges also comes down significantly as it is in direct proportion to the balance outstanding.