Thinking about canceling a credit card? Wondering what that will do to the balance or payment schedule? Wondering whether you have to pay the balance first? Or, are you facing the frightening possibility of credit card default?
As it turns out, closing a card is relatively easy, regardless of whether or not you have an outstanding balance at the time you cancel the card. And closing a credit card account does nothing to impact the balance or payment schedule.
It simply renders the card invalid: you’ll no longer be able to use it to make purchases or add new charges to the account. You can continue to make minimum payments or, preferably, larger payments to pay the balance down sooner and avoid paying interest rates until the balance is down to zero.
To cancel a card, call your carrier and request a closure. Chances are they’ll offer you incentives to keep your account open. (Whether whatever they offer is enough to keep the account open is for you to decide.)
After closing the account, ask for written confirmation. Your carrier should send it in the mail soon after the account closure. You should continue to receive bills as long as you have an outstanding balance with the carrier. Continue to pay these on time.
Remember, the carrier will still report your payment (or failure to pay) to the credit bureaus. One last step to confirm account closure is to request your free annual copy of your credit report from one of the three credit agencies. When you receive it, check to make sure the closed account and payments are reported correctly.
What if You Default?
Defaulting on a card is another story. If you fail to pay credit card balances for several months, your card is likely to enter default. Plus, many card companies will increase your interest rate after several months of failure to pay.
In other words, you might wind up owing much more than you expected, and much more quickly than you expected. Borrowers who default on card balances can be faced with all sorts of challenges: collections, judgments, and a poor credit score. If you default on a card, it won’t be long before the debt is turned over to a collection agency and reported to the three major credit bureaus.
Collection agencies are a varied bunch. Some are affiliated with the original company, and some are third party companies that collect debts for a fee. Other companies purchase debt for pennies on the dollar. Because of this variation, the amount due immediately might vary as well.
If you are still receiving communications from the original debtor, your payments are still subject to your card agreement. For the sake of your credit score, begin paying the minimum payments as soon as you can.
When your account has been turned over to a collection agency, the terms of your payment schedule should still remain the same. The only difference is that your original creditor has hired someone to collect for them.
Read the collection notices carefully to see what amount is due immediately. Try to begin paying as soon as you can. If they demand the full amount and you are unable to pay, call them and try to work something out. Try, and keep trying, since most companies will eventually settle for less than what you owe – rather than get nothing at all.
If a debt buyer has purchased your debt from the original card carrier, your situation is up in the air. Often times debt buyers purchase debt for as little as 15 cents on the dollar. They’re often very willing to accept less than the full debt as a result. See if you can negotiate with them. If you’re buried in debt and this process makes you worrisome, you may want to consider a professional debt settlement service.
At the end of the day, the advice is the same: pay at least the minimum, on time, but pay as much as you can. The less your balance, the less flies from your pocket in the form of expensive consumer interest.
Published or updated April 4, 2013.