Closing Credit Card Accounts to Manage Debt
Sometimes closing credit card accounts helps you get out of debt. Learn which ones to close.
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One way to manage high credit card debt is to get rid of some of your credit cards. Having too many cards can lead to overspending. Before you start closing credit card accounts, take some time to figure out which ones are best to close, and which ones you are better off keeping.
Determining credit cards to ditch, and which to keep can be tricky. Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard, offers the following advice:
Rules to Follow When Closing Credit Card Accounts
Consider these "rules" when closing accounts:
Close accounts on which you are delinquent, and ask the creditor to identify it to credit reporting agencies as “closed by customer request”—otherwise, the credit card issuer may close them for you with a negative notation in your credit record. The card issuer will close your account and cancel your privileges. It might also demand that you pay off the balance. Ask that it send you monthly statements allowing you to pay the balance off over time (and any interest and fees that accumulate on it) and suggest a reduced lump sum or a payment plan you can afford. (Learn more about negotiating lump sum settlements or payment plans.) If you’re delinquent on all your accounts, keep open the most current account.
Close accounts that are maxed out. You can close an account even if you haven’t paid off the balance. The card issuer will close your account and cancel your privileges. Ask it to send you monthly statements until you pay off your balance. Or contact the bank whose card you are keeping and ask it to transfer the balance on the account you are closing to the account you are keeping.
If you pay your bill in full each month—that is, you don’t carry a balance—close the accounts with the highest annual fees. Make sure that the accounts you keep open have a grace period in which you can pay off your bill and not incur any interest.
If you carry a balance, close the accounts with the highest interest rates, shortest grace periods, and least favorable balance computation method. Check your credit agreement disclosures to see which method the company uses to calculate interest. Keep the cards that use the adjusted balance method, or if none do, your next best choice is to keep one that uses the average daily balance method, including your payments but not your purchases during the billing cycle.
If you sometimes find yourself needing to pay at the last minute by phone, get rid of ones that charge extra if you talk to a customer service person to expedite payment. If you think you might make late payments here and there, get rid of ones with the highest late fees and default rates.
If you got a card for the low-interest offer on a balance transfer, don’t keep the balance on the card after the introductory low rate is over. Mark your calendar and plan ahead how you will handle the balance when the low rate expires. Pay off the balance or transfer to a lower-interest-rate card.
Will Closing an Account Affect Your Credit Score?
Before you close an account, especially one you have had for a long time, consider how it may affect your credit score. On the one hand, if you close an account you haven’t used, that has no, or only a small outstanding balance, your credit rating may decrease. Why? The credit report may show your overall debt is now larger in relation to your total available credit. Fair Isaac, the developer of the FICO credit score recommends against closing unused credit card accounts if your purpose is to raise your FICO score. (Learn more about FICO scores and rebuilding credit.)
On the other hand, today, many creditors refuse credit to people they believe already have too much credit and some are even closing unused accounts themselves. Having an unused account could be grounds for denying you future accounts you do want or limiting increases on existing accounts. And a notation in your credit report of “closed by consumer request” is better than a notation that the creditor closed your account.
So, to maximize the benefit of closing accounts, close the accounts on which you are in default already, or ones with large outstanding balances owed, particularly ones that are maxed out. But be aware that creditors may close out unused accounts in hard economic times and you may want to close them before they can.
Once you have figured out which accounts to close, see How to Close Credit Card Accounts, to learn how to close them the right way.
For more articles on managing high credit card debt, see our Managing Credit Card Debt topic.
Excerpted from Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard (Nolo).