What Happens To My Balance If A Credit Card Is Closed By The Bank?

What Happens To My Balance If A Credit Card Is Closed By The Bank?

October 20, 2020         Written By Tracy Farnsworth

Credit card issuers have the right to close credit card accounts as they deem necessary. They may close an account for any number of reasons. From not paying on time, charging up a massive amount of debt in a short time and even account inactivity are all reasons your account could be closed by the bank. Sometimes, if you have a store credit card, it may be closed if the store goes out of business.

No matter what has led to the account closure, there are a few different ways it can affect you and your credit. At the very least, you may need to apply for a new credit card if you need the credit line. Applying for a new credit card may impact your credit score as credit checks are performed during the application process. The balance found on your card when the account was closed may also impact your score.

What Happens to My Balance?

Your balance will still be owed to the credit card company. Just because your account was closed does not mean that your balance magically disappeared with your account. You’ll still need to make payments to pay off the balance, you just will not be able to make any new purchases. There are other things to take into consideration if one of your accounts is closed by the bank.


Credit Card Closures Can Hurt Your Credit Score

If you have an account closed by the bank, you need to understand what that means for you. There are many cases where an account closure can negatively affect you. If you are carrying a balance when the account is closed, you will still owe that money back and it will remain on your credit report. You will still need to make payments on your balance so make sure you understand how to do so if your account is closed. If you are not carrying a balance and your account is closed, it could alter your credit utilization ratio, which is an important measure in determining your credit score.

Even if you are doing everything you can in paying at least your minimum payments and paying them on time, it could still hurt your credit score. The debt you have from the card if any, will stay on your credit report but the credit line you used to have may not. When the credit line you borrowed against falls off your report your credit utilization may go up drastically depending on your remaining balance. 

What if the Closed Account Was a Secured Card? 

Typically in the case of a secured card, if your account is closed, your balance will be subtracted from your security deposit and the remainder will be returned to you. Make sure you do not have any fees that push you above your credit limit, as you may have to make payments to cover any overages above your security deposit.


What Do You Do Next?

The best way to improve your credit score is to pay down as much as you can on your credit card. Do not pay the minimum if you can afford to pay extra. The more you can pay, the better. Start with the card you owe the least on. You may think it is smarter to focus on the card with the highest APR, but if that is the card you owe the most money on, the length it takes you to pay it off may cause you to feel hopeless. Choose a card that you can get paid off the soonest. When you have that card paid off completely, you will feel good about yourself. You will have accomplished something and have the motivation you need to keep going. After paying off one card, you can move to a card with a higher interest rate. When you pay off a card, apply the payments from the first card to the second, this will help in paying down debt quickly.

You may be able to transfer the balance on the canceled card to a credit card with a 0% introductory balance transfer offer, depending on why your account was closed. If it is closed due to bad credit management this may not be an option for you. Transferring your balance can help reduce your credit utilization and give you interest-free payments for the extent of the intro period. Opening a card is not ideal, but it may be better than having a hit on your credit score for high credit utilization. Make it your aim to pay off the debt by the end of the introductory period. If you qualify for a card with a 0% APR on balance transfers for 12 months, divide the amount you owe by 12 and make those payments on time each month, in many cases, one missed payment on an introductory offer can actually end the introductory period prematurely. If that happens, you will begin accruing interest on your transfer sooner than you anticipated. You will typically need good credit or better to qualify for a balance transfer card.

What if you are already falling behind on the canceled card? If you ever find yourself in a position where you are falling behind the best thing you can do is talk to your credit card issuer. Explain your situation and see if they will work with you. It is better than ignoring the situation. They may offer a payment plan you can afford for now that increases as your financial situations improve.

What If You Simply Do Not Pay?

If six months pass and you have not made a payment, the issuer of your credit card will likely sell your debt to a debt collection agency or move your balance to an in house collection department. Debt collection agencies pay a percentage of the amount that is due when they buy your file. You will then owe the debt collectors instead of your original creditor. It is always best practice to pay off your debt and avoid collection. If you have the ability to continue making payments if your card account is closed by the bank, do so, as dealing with debt collection agencies can be frustrating.

If your debt does go to a collection agency, make sure you are prepared before you come in contact with them. You may be able to negotiate a smaller debt amount and set up payments with the collection agency. Read the Consumer Financial Protection Bureau’s three-step plan to negotiating a fair settlement with debt collectors. You want to learn as much about the debt as you can. Make sure the debt they are saying you owe is yours, you have the right to ask for proof that it is indeed yours. Find out who the debt was with and how much you owe. If you are going to dispute any of it, you need to do it within 30 days of getting the notice from the debt collection agency. Use the bureau’s sample letters if you need help wording your requests.

Once you are armed with the information you need, come up with a settlement proposal. Scour your financial status, write all of your expenses down, and decide how much you can realistically pay each month. If you make $2,000 a month and your rent, groceries, and utilities are $1,800, you only have $200 left. You should not promise to pay more than that. You do not want to agree to pay $200 a month if it is going to be hard to get that money together each month. At this point, look for a non-profit credit counselor who can help you negotiate a fair settlement offer. Never use a company that charges a fee to help you. If you skip using a credit counselor, be prepared to explain your situation, go over the details of your repayment plan, and get any agreement in writing. Do not make a payment without having the agreement in writing.

Non-payment to your credit card issuer should be a last resort as it will show up as a “collection” status on your credit report if they send it to collections, which shows other lenders that you are high risk. It can take a full decade before you get a collection off your credit report. Do not rely on debt transferring from one collection agency to the next. If you have a debt, you should make plans to pay it off if you have the means to do so.

While it is best to not charge more than you can afford, unavoidable situations can happen. Credit card issuers do not make a habit out of canceling credit card accounts without good reason. If you are not sure why it has happened to you, ask for an explanation. You may be able to talk to the bank into working with you on an alternative that does not impact your credit score. You never know unless you ask. It is important to remember that just because your account is closed that does not mean your debt is gone, you’ll still need to pay it off.

The information contained within this article was accurate as of October 20, 2020. For up-to-date information on any of the terms, cards or offers mentioned above, visit the issuer's website. Many of the offers on this article are from our affiliate partners, and LowCards.com may be compensated if you take action with any of our affiliate partners.

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tracy

About Tracy Farnsworth

Tracy Farnsworth went straight from a business track in high school to a full-time job in mortgage banking in Burlington, Vermont. After having children, she built a freelance career in content writing and took online classes as time allowed. She completed Social Media Marketing and Digital Marketing certificate programs with Ireland's online Shaw Academy and completed several courses in SEO and analytics. In her free time, she's the “mom” to a very clingy rat terrier, and the pair walk at least a mile every day. She's also a novice baker who is trying to master the art of sourdough bread.