Can you cancel a credit card if you still owe on it?
Understand the financial and credit implications of closing a credit card account while still owing money. Learn what to expect.
Many individuals wonder about canceling a credit card while an outstanding balance remains. While it is possible to close a credit card account even if it carries a debt, this action does not eliminate the underlying financial obligation. The decision to close an account with a balance involves various considerations beyond simply ending new purchases.
Understanding Account Closure with an Outstanding Balance
It is possible to close a credit card account even if there is an outstanding balance. When a credit card account is closed, it transitions from an active, revolving line of credit to a closed account, meaning no new purchases or cash advances can be made. This action, however, does not erase the debt incurred before closure. The outstanding balance remains a legally binding obligation that the cardholder is responsible for repaying.
The terms of the original credit agreement generally continue to apply to the outstanding balance on a closed account. This means that the interest rates, minimum payment requirements, and any applicable fees remain in effect until the balance is paid in full. The financial responsibility for the existing debt persists. The credit card issuer will continue to send monthly statements for the outstanding balance, requiring regular payments until the debt reaches zero.
Your Ongoing Financial Obligations
After a credit card account is closed with an outstanding balance, the cardholder’s financial obligations persist as they did when the account was active. Regular minimum payments are still required each billing cycle to avoid late fees and potential penalties. Interest will continue to accrue on the outstanding balance until the entire debt is repaid.
Failing to make timely payments on a closed account can lead to significant negative consequences. Late payments can result in additional fees, and in some cases, the interest rate on the outstanding balance may increase to a penalty APR. Continued non-payment can lead to the debt being sent to a collection agency, which will pursue the payment and can report the delinquency to credit bureaus.
If a debt on a closed account goes into default, the credit card issuer may “charge off” the account. While this does not eliminate the debt, it marks the account as severely delinquent on the cardholder’s credit report, which can remain for up to seven years. This negative mark can severely impact the cardholder’s ability to obtain new credit, loans, or even housing. Therefore, maintaining consistent payments on closed accounts is essential to mitigate financial and credit score repercussions.
Impact on Your Credit Profile
Closing a credit card account, especially one with an outstanding balance, can influence an individual’s credit profile in several ways. One primary factor is the credit utilization ratio, which is the amount of credit used compared to the total available credit. When an account is closed, the available credit from that particular card is removed from the total, while the outstanding balance remains. This reduction in total available credit can cause the utilization ratio to increase, potentially leading to a decrease in the credit score. A higher credit utilization ratio often signals increased risk to lenders, which can negatively affect credit scores.
Another aspect is the length of credit history, which factors into credit scoring models. Older accounts contribute to a longer average credit history, which is generally viewed favorably by credit bureaus. While a closed account with a positive payment history can remain on a credit report for up to 10 years from the date of closure, closing an older account might eventually shorten the average age of accounts over time. This gradual reduction in the average age of credit history could have a subtle, long-term negative impact on the credit score, particularly if the closed account was one of the oldest in the credit file.
The Process of Closing a Credit Card
When a cardholder decides to close a credit card account, the process generally involves directly contacting the credit card issuer. This can be done by phone, through an online portal, or by sending a written notice. It is advisable to clearly state the intent to close the account. Some card issuers may attempt to retain the customer by offering incentives, but the cardholder can reiterate their decision to proceed with closure.
After initiating the closure, it is important to request written confirmation from the credit card company that the account has been closed. This documentation serves as proof of the closure and can be useful for record-keeping. The confirmation should also include information about any remaining balance and the continued payment schedule.
Once the account is confirmed as closed, the physical credit card should be properly destroyed to prevent any unauthorized use. This involves cutting the card multiple times, especially through the magnetic strip and chip. Finally, the cardholder should continue to monitor statements for the closed account until the balance is fully paid off, ensuring no unexpected charges or interest accruals occur.