What Happens to my Balance if a Credit Card is Closed by the Bank?
As we have previously discussed, your credit card issuer can close your account at any time. Even if you do not owe a balance on the card, having an account closed could hurt your credit. If you owe a lot of money on other cards, having a credit card account closed could increase your credit utilization, which can decrease your credit score. However, if you do not carry much debt at all, your credit score may not take much of a hit.
More problematic is when you do owe money on your credit card when the account is closed. The best case scenario is that your bank will keep the debt, and you will continue to send your payments to them. Your credit score will likely take a negative hit in this case, as your bank may report your credit limit as $0 but you still owe money, which means your credit utilization will be quite high. Thus, you will want to pay off the debt as quickly as possible to get your credit back on track.
Let’s look at how this might work. Say you owe $700 on the card that was closed and have another credit card with a limit of $1,000 on which you owe $300. Since your credit limit is $0 on the closed card, you are currently using $1,000–all of your available credit. To maintain a high credit score, you want to use no more than 30% of your available credit, which means you must pay down the balance on the closed card. If possible, you can transfer the balance to your open credit card. Your credit utilization will still be too high, but you will be showing a positive payment history on an open account, which can boost your score in other ways.
It is possible your creditor may sell your debt to a collection agency, especially if you are more than six months behind on payments. If this happens, you will have no more dealings with your credit card company and will work directly with the collection agency. This is bad news for your credit score, as your account will be listed as in “collection” status, which will notify would-be lenders that you are a credit risk and can drop your credit score significantly. Negative marks on your credit report could be there for as long as 10 years.
The only upshot to your debt being sold is the collection agency may allow you to settle for less than the entire amount owed. If you truly cannot pay off the full balance, this may be your best opportunity to get out of debt. The Consumer Financial Protection Bureau has put together a guide for negotiating with debt collectors. They even offer sample cover letters based on a number of common situations.
It is important to note you should not just let your debt make the rounds of collection agencies in the hopes that it will some day be written off. Not only will this destroy your credit score, you could be taken to court. If you are found guilty, your assets can be seized, or your wages could be garnished. If you do not owe a lot, it is unlikely you will be sued, but there is no way to know for sure.