Wednesday, January 27, 2010

Closing a Credit Card Account

Paying off and closing a credit card account is a wonderful feeling.  They will refer you to a "closing specialist" when you close the account.  Listen carefully to see if you can get a good deal, but don't be tempted by the siren song of more debt.  In most cases, you are better off just closing the account.

Hopefully, if you have followed some of the advice here and elsewhere, and cut back on spending and paid down your debts, you will reach a point where you have paid off one or more of your credit cards.

The question is, should you keep that card, now that it is paid off? As it is hard to survive in this economy without a credit card, I would not suggest closing all your credit card accounts. But it does not pay to have multiple credit card accounts.

Many Americans have two, three, four or more credit cards, all with high balances, as well as store cards, gas cards, and other consumer debts. I would suggest it is better to have one, low interest rate credit card (6-8%) with a reasonable balance limit ($5000) than to have all these open lines of credit.

If you don't have a lot of debt, and need to borrow money, trust me, you'll be able to. The idea that you should keep a credit card open "just in case" you need a line of credit later on is troublesome. Human nature being what it is, an open line of credit is a temptation to spend - a temptation that you will give into, eventually.

Not only that, but an open line of credit will lower your credit score. Even if your credit card is "paid off", if you have a $20,000 credit limit, it shows on your credit report, and will lower your score and make lenders more reluctant to lend, as you could rack up a lot of debt, in not a lot of time.

So, once you have paid off a credit card (preferably the higher interest rate cards first) it is probably a good idea to close the account. This can be done by phone. When you call the credit card company and tell them you are closing the account, they will switch you to a "closing specialist". Some consumers get upset that they have to talk to yet another person. However, this "closing specialist" chat can be an opportunity.

You see, now that the card is paid off, you are in the catbird seat. If you have been making payments on time, then they don't want to lose you as a customer. Before, when you had credit card debt, you were not in a position to negotiate anything. But now, with one foot out the door, you may be able to wrangle concessions.

For example, I closed a Citibank Visa account a couple of years back. The card had a high interest rate and it was no bargain. The closing specialist asked me why I was closing the account and when I told him it was the interest rate, he immediately offered me a lower rate, if I would stay on with them. When I demurred, he put me on hold for a moment and then came back with a new offer: If I would switch to a Mastercard, they would lower the rate to 5.99%.

That's a pretty attractive offer - lower than many people's mortgage interest rates, these days. And far below the average interest rate on most credit cards (14.5%) Not only that, but they were willing to do a balance transfer from a higher rate card with zero percent interest for 10 months. Now note that balance transfers can be tricky things - see my posting on this subject. But in some instances, they can be used, if you are very, very careful, to save money and help you pay down debt.

The point is, once you have paid off a card and threaten to leave, they are willing to do things to keep you onboard. This can be an opportunity, so look into it.

Other card companies might not be so eager to keep you on. Barclay's Bank, for example, did not have much to offer me. It was a mileage rewards card, and as I have learned from hard experience, these are often no bargains. When I paid off the balance on the card and closed it, they sent me to the "closing specialist". He was not able to offer any serious interest rate cuts (to less than the other cards I have) but did offer a balance transfer. However, at this point, such a transfer makes little or no sense, as my base interest rates on my cards, and the remaining balances are low.

It made better sense to close the card. By the way, once you close the card account, make sure you monitor the account (through the card website) for at least a few months. While the card may show as closed, the account will remain active, as recurring charges or late closed charges may still appear. You may still own the card company money. Once the card has been closed for several months, make sure you check the status on your free annual credit report (the really free one, not the con-job that is advertised heavily) to make sure it shows as closed.

If you are closing a credit card account, congratulations. Hopefully this is a step toward more financial responsibility and a brighter future. Once you pay off debt and become debt-free, you'll find that your opportunities improve. The best loan terms and interest rates are offered to people who "don't need the money". So just as getting into debt can spiral into a pit of increasing indebtedness, higher interest rates that are increasingly hard to recover from, once you are out of debt, your financial options improve accordingly - you are offered better terms and better deals.

And that, in a nutshell is what this blog is all about. Once you get out of the debt lifestyle, you can live a life that is twice as rich - or work half as hard, if you want to. How you spend your money makes a huge difference in how your life is lead. Unfortunately, for many Americans, life is one long continual string of debt that ends only when they die.

We don't have to live that way, if we choose not to.