Does Closing a Credit Card With a Balance Hurt Your Credit?

When considering closing a credit card with an existing balance, many individuals are concerned about the potential impact on their credit standing. This decision often arises from a desire to simplify finances or eliminate the temptation to incur more debt. However, closing such an account can affect one’s credit profile in unexpected ways. Understanding these complexities is important for making informed financial choices, as the impact extends to how creditworthiness is assessed by lenders and credit scoring models.

How Credit Scoring Models Respond

Closing a credit card, especially one with an outstanding balance, can directly influence key components of a credit score. Two primary factors susceptible to change are credit utilization and the length of credit history. Credit utilization, also known as the credit utilization ratio, represents the percentage of available credit currently being used. It is calculated by dividing total credit balances by total credit limits across all revolving accounts. This factor is a significant determinant of credit scores, accounting for approximately 30% of a FICO score and 20% of a VantageScore.

When a credit card account is closed, its credit limit is removed from the total available credit. If a balance remains on the closed card or on other open cards, this reduction in available credit will likely cause the credit utilization ratio to increase. For instance, if an individual has a total credit limit of $10,000 and carries a $3,000 balance, their utilization is 30%. Closing a card with a $5,000 limit, while maintaining the $3,000 balance, would reduce total available credit to $5,000, pushing the utilization ratio to 60%.

Lenders and credit scoring models prefer to see a credit utilization ratio of 30% or lower, with those having excellent credit often maintaining it below 10%. A higher utilization ratio can signal to lenders that a borrower might be overextended financially, potentially lowering the credit score.

The length of credit history also plays a role in credit score calculations, making up about 15% of a FICO score and 20% of a VantageScore when combined with credit mix. Credit scoring models consider the age of the oldest account, the newest account, and the average age of all accounts. Closing an older credit card account can reduce the average age of all credit accounts, which may negatively impact this factor. While a longer credit history signals responsible credit management, it is not the most influential factor compared to payment history and amounts owed.

What Happens to the Outstanding Balance

Closing a credit card account does not eliminate the debt associated with any outstanding balance. The balance is still fully owed and must be paid according to the original terms agreed upon with the card issuer. This means that regular minimum payments are still required, and interest will continue to accrue on the remaining balance until it is paid in full. The card issuer will continue to send monthly statements detailing the amount due.

On credit reports, the account status will change to “closed with balance” or a similar designation. Even after closure, the issuer continues to report payment activity to the major credit bureaus. This continued reporting is important because payment history is the most significant factor in credit scoring, often accounting for 35% of a FICO score and 40% of a VantageScore. Any missed or late payments on the closed account will still be recorded and can negatively affect the credit score, just as they would with an open account. It is important to continue making timely payments on a closed account with a balance to avoid further negative impacts on one’s credit history.

The Ongoing Presence on Credit Reports

A closed credit card account does not immediately disappear from a credit report. Both positive and negative information associated with closed accounts can remain on credit reports for several years. Accounts closed in good standing, meaning they were paid as agreed, can stay on a credit report for up to 10 years from the closure date. This continued presence can still contribute positively to the length of credit history and demonstrate a track record of responsible financial behavior.

Conversely, negative information, such as late payments, defaults, or accounts sent to collections, remains on a credit report for about seven years from the date of the original delinquency. For instance, a missed payment that led to the account’s closure will continue to be reported for seven years from that initial delinquency date. Even though an account is closed, its payment history continues to influence the payment history component of the credit score. The historical data, whether favorable or unfavorable, associated with the closed account remains visible to lenders and is considered by credit scoring models for an extended period.