When closing card with a balance, score impact occurs later

This post originally appeared June 7, 2018 on CreditCards.com as “Will closing card with a remaining balance hurt my credit?

By Barry Paperno

Dear Speaking of Credit,
Chase has notified me that they are raising the interest on my card because, in the words of Chase, my “APRs are below the lowest APRs we currently offer on similar accounts.”

I have the right to reject the changes by next Wednesday. If I do, they say they will close the account and I can continue to make payments until the balance is paid off at the old APR.

My question is, will that hurt my credit? – Lynn

Dear Lynn,
By now, it has become pretty clear to credit score enthusiasts that closing a credit card can lower a score.

What’s not always so clear is when to worry and when not to worry if that will be your experience the next time you close a card.

Let’s start by separating some fact from fiction about scores and closing accounts with a good understanding of some credit scoring forces typically at work when you close a credit card.

Effects of closing card on credit score
At the center of these forces is a set of scoring calculations that measure how much you owe compared to how much credit you have available: credit utilization.

Making up almost 30 percent of your score, credit utilization calculates the percentage of available credit you’re currently using (current balance/credit limit=utilization percentage).

Closing cards can seriously affect your score by helping to dictate which revolving accounts are included and which are left out of the utilization calculations.

For this discussion, there are essentially two types of closed cards – those with and without a balance at closing time:

  • Closed, leaving a $0 balance. The card’s $0 balance and credit limit are removed from utilization and other debt measuring calculations. This exclusion of the closed card can lead to higher overall utilization and a lower score, especially if other cards with higher utilization remain after the card is closed.
  • Closed, leaving a balance greater than $0. The card’s current balance and credit limit will continue to be factored into the score until paid in full. Expect no initial effect on the score, but some negative impact is possible when the balance is later paid off.

Since your proposed situation falls within the second of the above types, let’s look at how including or excluding a card’s balance and credit limit can affect the overall credit utilization – and, of course, the score – when the balance eventually drops to $0.

Closing a card when other cards are highly utilized
The following example shows an already-high overall utilization rate made worse by closing and paying off the only lowly utilized card.

Whether that payoff occurs at the same time as the closing, or later, as you’re considering, a closed card’s balance dropping to $0 from any higher amount can easily trigger a higher utilization percentage and lower score.

Example 1
While the other cards remain maxed out, overall utilization rises by 16 percent – from 84 percent to 100 percent – when Card A is closed and paid in full.

Before closing Card A Balance Credit Limit Utilization
Card A $30 $1,000 3%
Card B $2,000 $2,000 100%
Card C $3,000 $3,000 100%
Total $5,030 $6,000 84%

 

After closing, paying Card A in full Balance Credit Limit Utilization
Card A $0 $0 0%
Card B $2,000 $2,000 100%
Card C $3,000 $3,000 100%
Total $5,000 $5,000 100%

Though it is highly unlikely that the above example reflects your own credit standing, the utilization impacts shown should serve as just one of many good reasons – the substantial interest expense, for one – not to carry high card balances.

Closing a card when all cards have low utilization
Now let’s look how your score might behave when the other cards carry a much lower overall utilization percentage.

Example 2
With the other cards carrying a low utilization, overall utilization remains unchanged when Card A is later paid in full after the initial closing.

Before closing Card A Balance Credit Limit Utilization
Card A $30 $1,000 3%
Card B $100 $2,000 5%
Card C $200 $3,000 7%
Total $330 $6,000 6%

 

After closing, paying Card A in full Balance Credit Limit Utilization
Card A $0 $0 0%
Card B $100 $2,000 5%
Card C $200 $3,000 7%
Total $300 $5,000 6%

While perhaps this is just as unlikely to be your experience, Example 2 shows how a low utilization percentage prior to the closed card reflecting a $0 balance can mean few or no ill effects from the closing – either immediately or in the future.

Action plan: Close card, pay in full, lower your other balances
Therefore, the answer to your question lies in three parts:

  1. In the short run, no matter how high or low your current overall utilization may be, closing this card will not further impact your score for as long as a balance remains.
  2. Once the balance has been paid off, expect some score damage if your overall utilization is high, such as over 50 percent. At lower percentages, any damage to your score should be less.
  3. Any detrimental effects to your score after payoff will vary according to all remaining card balances and credit limits.

So, go ahead and reject that new APR by allowing your account to be closed if you like. There shouldn’t be any immediate downside for your score.

And if there are any scoring consequences when that balance reaches $0, just curb your charging and pay down any remaining card debt as fast as possible.

Your score will be headed back in the right direction before you know it.

Good luck!

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