When You Close a Credit Card Account Do You Still Pay Interest?
The Federal Reserve Bank of Boston survey of consumer payment choice found there were 176.8 million people with credit cards in the United States, as of 2008. The same survey determined that the average person has 3.5 credit cards. Cardholders sometimes choose to reduce their number of accounts by closing them, even if they still have a balance that is accruing interest. Closure does not stop the interest.
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Process
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A credit card account can be closed by calling the issuer and requesting closure, but Dolans Money Made Simple says it is best to send a letter. The correspondence should request termination of the account and ask for a notation to the credit bureaus that it was closed at the customer's request. Banks often close accounts because of delinquent payments or other problems, which reflect badly on the person's credit rating. The "closed at customer's request" note prevents this problem.
Considerations
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Banks will close a credit card account that still has a balance, but the remaining amount must be paid as agreed. The consumer can continue to make monthly payments or settle the entire balance with one payment. The unpaid balance continues to accrue interest for as long as it remains unpaid. New interest charges are added every month.
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Effects
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Continued payments on a closed account show up on Equifax, Experian and TransUnion credit reports and continue to affect the account holder's credit records. The payments contribute to a good credit score if they are always made on time because FICO singles out payment history as an influential factor. Slow or skipped payments pull down the score.
Solution
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Some consumers avoid paying interest on the remaining balance of a closed credit card account by transferring it to a new account with better terms. Banks occasionally offer zero percent interest on transferred balances or low interest rates for a limited time to entice new customers. They may even do the transfer with no fee.
Alternative
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People sometimes put unwanted credit cards aside or cut them up instead of formally closing an account. They continue to pay interest until the balance is satisfied, then let the account stay open and unused. Financial radio show host Clark Howard recommends occasionally using those credit cards to keep favorable activity showing up on credit reports. Use them twice a year for small transactions and pay them off immediately. Interest is added if those purchases are not paid off within one billing cycle.
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