Can you close a credit card with a balance?

You can indeed close a credit card that still has a balance, but it’s crucial that you continue to make payments — at least the minimum — until the card is paid off.

The reason is that closing your card, which still carries a balance, could affect your credit utilization ratio (or how much of your available credit you have used), one of the most important factors in your credit score. This factor is second only to payment history in importance to your FICO score. For VantageScore, this factor is weighted even more heavily — VantageScore refers to it as “extremely influential.” Even if an account has been closed, credit utilization (along with the other factors that make up your credit score) still comes into play.

What happens to your balance after you close a credit card?

When you close a credit card that has a balance, that balance doesn’t just go away — you still have to pay it off. Keep in mind that interest will keep accruing, so it’s a good idea to pay more than the minimum each billing period.

In addition, when you close a card, it can hurt your credit score, particularly if you’ve had the card for a long time. Closing a long-time card may eventually shorten your average credit age, which counts for 15 percent of your FICO score. (However, note that an account in good standing stays on your credit report for 10 years.)

If you have other cards with balances on them, it could also increase your credit utilization, which counts for 30 percent of your FICO score. To find out your credit utilization ratio, use this handy calculator.

If you close a card, keep in mind that you’ll likely lose any rewards you’ve earned. Be sure to redeem those rewards before you close the account or apply them to your current bills as a statement credit.

How a closed credit card with a balance impacts your credit score

When you cancel a card, any available credit on the account at the time of the closure is no longer accessible to you, and that can affect your score. Since you no longer have access to the account, it may appear that a closed account is fully utilized. But it is not as simple as that.

Credit scoring is complicated

While the factors of credit scoring (payment history, credit utilization, credit age, credit mix, new credit) seem pretty straightforward, the science behind credit scoring is complicated. Credit scoring is all about assessing risk and predicting future defaults. How much risk is a new lender taking on when they accept you as a new customer?

Closed accounts are a case in point. Accounts are closed all the time for many different reasons and can be closed by either the lender or the user. For instance, a lender might close an account due to nonpayment or non-use, while a user might close an account because the lender changes the terms.

So, rather than simply calling a closed account 100 percent utilized, the scoring algorithm will look at what the credit limit was at the time the account was closed because this will give a better assessment of risk, no matter why the account was closed.

If your account had 80 percent of its credit line utilized when it was closed, the debt owed still represents a risk to any lender thinking of giving you new credit. So, it will score lower than if the balance was a smaller percentage of your limit.

Payment history counts, too

Credit utilization is not the only factor at play here. Payment history is the most influential factor in FICO scoring and is moderately influential in the VantageScore model. So, if the account was closed for nonpayment, for instance, that is going to heavily impact your credit score. Whether or not the card still has a balance may be irrelevant to your score if it has already plummeted due to delinquency.

The opposite is true if the account was closed by the user due to a change in terms — if payments were made on time and as agreed, that would be reflected in a positive way even though the account is now closed.

For many, though, accounts with a poor payment history are closed, and that is what causes the most damage to a credit score. Poor payment history is often the result of the credit card in question having a high interest rate, which makes it more difficult to keep up with. This is especially true if only minimum payments are made. While making minimum payments on time will help you avoid a poor payment history, it won’t help you get out of debt.

Should you keep the credit card account open?

Before you decide to close or leave the account open, take the following things into consideration:

• You might want to keep it open if you’re planning to make a big purchase soon.
• If you’re planning to apply for more credit in the near future, it makes sense to leave it open.
• If you’re in a lot of debt already, keeping the card open could tempt you to take on more.
• If you’re paying a high annual fee and you’re not getting enough benefits from the card to offset that, it could be a smart move to close it.

If you decide to close the card, you can offset any impact it might have on your credit by paying off the balances on the other cards you hold.

There are many ways to tackle credit card debt, including the avalanche and snowball methods and debt consolidation (one strategy for this could be taking out a balance transfer card).

Should I pay off my debt before or after I close the card?

If you ultimately decide to close the card, it may be a good idea to pay the balance off first or at the same time, especially if the account has a troubled history. That way you can be done with both the account and its debt. Plus, a credit card issuer may not consider your card officially closed until your debt is paid off anyway.

If keeping the card open tempts you to spend more or it has a high annual fee, then it might be wise to close it ASAP and then focus on paying off the balance. Your credit score may be lower due to some of the aforementioned effects of closing the card, but as you add positive payment history to your credit report and reduce the balance, your score should eventually improve.

Bottom line

Paying off a closed card’s balance is especially important to do before you look to add new credit to your file. Applying for credit and generating a hard inquiry will ding your score temporarily. You don’t want to add insult to injury by applying too soon and being denied because a closed negative account is still dragging down your score.