What Happens If a Credit Card Company Closes Your Account?
Understand the repercussions when a credit card company closes your account and how to proactively manage the outcome for your financial well-being.
When a credit card company closes your account, the issuer terminates your ability to make new purchases or cash advances with that card. This action can occur for various reasons, including prolonged inactivity, a history of late payments, exceeding your credit limit, or changes in the issuer’s policies or your credit risk profile. While the closure prevents future transactions, it does not erase any existing debt you may have on the account. Understanding the implications is important for managing your financial standing.
Immediate Effects of Account Closure
When a credit card account is closed, the card becomes unusable for new purchases. Attempts to use the card will likely result in a decline. This can be particularly disruptive if you have recurring payments or subscriptions linked to the card, as these will fail unless updated with a different payment method. Update any automatic payments to avoid service interruptions and additional merchant fees.
Pending transactions at closure will still be processed. Pending transactions are authorized purchases not yet fully posted, typically completing within a few days. Even if your card is canceled, you will still be charged for these purchases, and they will be added to your outstanding balance. The outstanding balance at closure remains fully due, and you must repay it according to the original terms. While issuers are not legally required to provide advance notice of account closure, they may send a notification, often by mail, after the fact.
Impact on Your Financial Health
A closed credit card account can impact your financial health, particularly your credit score. One major factor affected is your credit utilization ratio: the amount of credit used compared to your total available credit. When an account with an available credit limit is closed, your overall available credit decreases. If you carry balances on other credit cards, this reduction in total available credit can cause your credit utilization ratio to increase, which may negatively impact your credit score. Experts recommend keeping overall credit utilization below 30% for a healthy credit score.
The length of your credit history also plays a role in your credit score, and closing an older account can affect this metric. A closed account with positive payment history remains on your credit report for up to 10 years, contributing to your credit age. However, it can eventually shorten the average age of your accounts once it falls off. A longer credit history benefits your score by demonstrating consistent credit management. The payment history on the closed account, whether positive or negative, will continue to be reported to credit bureaus for several years, influencing your score.
Rewards points or benefits accumulated on the closed account may also be at risk. Whether you retain these rewards depends on the card issuer’s policies and the type of rewards program. For some programs, especially those tied to airline or hotel loyalty programs, points might transfer to your loyalty account and remain accessible. However, with proprietary issuer rewards programs, you might forfeit unredeemed points or cash back upon account closure, although some issuers may offer a grace period to redeem them. Check the terms and conditions of your rewards program or contact the issuer to understand their policy.
Steps to Take After Closure
After a credit card company closes your account, proactive steps can mitigate negative impacts and regain financial control. Contact the credit card issuer directly to understand the reason for closure. While they may not always disclose the exact reason, understanding it can inform your next steps, especially if it was due to inactivity or a policy change. You can inquire about any remaining balance, options for payment, and the status of any unredeemed rewards.
Regularly review your credit report from all three major credit bureaus (Equifax, Experian, and TransUnion) to ensure accurate reporting of the closed account. You are entitled to a free copy of your credit report annually from each bureau. Confirm that the account is marked as closed and that the outstanding balance, if any, is correct. Promptly dispute any inaccuracies found on your report.
Paying off any outstanding balance on the closed account is important. Even if the account is closed, the debt remains, and interest and fees can continue to accrue. Not paying the balance can lead to late payment reports on your credit history, further damage to your credit score, collection efforts, and potentially legal action. You can explore payment options such as making regular payments until the balance is paid in full, or, if facing financial hardship, discuss a payment plan or potential settlement with the issuer. If necessary, consider exploring alternative credit solutions, such as secured credit cards or credit-builder loans, to help rebuild your credit history and improve your credit score over time.