Can I Close a Credit Card Before Paying It Off?

You can close a credit card account even with an outstanding balance. However, closing the account does not eliminate the debt. There are considerations and implications to evaluate before proceeding.

Understanding Your Obligation

When a credit card account is closed, the cardholder remains legally obligated to repay the full outstanding balance. Responsibility for the debt continues even after an account is closed. Payments are still required according to the original terms. Minimum payments must be made by their due dates to avoid late fees and negative credit report marks. Interest continues to accrue until the debt is paid in full.

Implications for Your Credit Profile

Closing a credit card with an existing balance can impact your credit score and overall credit profile. A significant factor is the credit utilization ratio, which measures credit used against total available credit. When an account is closed, total available credit decreases, potentially causing this ratio to increase. Financial professionals recommend keeping credit utilization below 30% to maintain a healthy credit score, as higher ratios negatively affect it.

The average age of accounts also plays a role in credit scoring models. Closing an older credit card account can reduce the average age of all credit accounts, which may be viewed unfavorably by lenders. While closed accounts in good standing typically remain on credit reports for up to 10 years, their impact on the average age may diminish over time. Reducing the number of open credit accounts could also affect the diversity of credit types, which lenders sometimes consider.

Steps to Take When Closing an Account

If you decide to close a credit card account with a balance, follow these steps:

• Contact the credit card issuer to formally state your intention to close the account.
• During this call, confirm the exact payoff balance, including any interest that may accrue until the final payment is processed.
• After confirming the balance, make the final payment promptly.
• Once paid off, request written confirmation from the issuer that the account is closed with a zero balance. This documentation serves as a record.

Alternative Approaches to Managing Debt

Instead of immediately closing a credit card with an outstanding balance, consider alternative debt management strategies. Prioritizing paying down the balance before closing is often the most advisable approach. This helps mitigate negative impacts on your credit profile. Another option is exploring balance transfers to a credit card with a lower annual percentage rate (APR), especially if a promotional 0% APR offer is available. While balance transfers help consolidate debts and save on interest, they often involve a transfer fee, typically 3-5% of the transferred amount.

For those struggling with significant credit card debt, non-profit credit counseling agencies offer debt management plans (DMPs). These plans help lower interest rates and consolidate multiple payments into a single monthly payment, providing a structured path to debt repayment. Creating a detailed budget to accelerate debt repayment is also a beneficial strategy.