Applying for and opening a new credit card can be exciting because there is usually a welcome bonus after the spending requirement is met.
At the end of each billing cycle, you will receive a statement showing the money you still owe the issuer. Paying the balance in full and on time is strongly emphasized here at TPG.
However, what happens if you take out a credit card with a balance? Will it be forgotten by the wind, or could it hurt your credit score and affect future borrowing needs?
Today we’ll explore whether you can close a credit card with a balance or if you should close it with a zero balance instead.
Pay off a credit card or carry a balance?
To avoid interest charges, it is best to pay off your credit card balance every month. When you carry a balance from month to month, interest charges begin to add up, reducing the value you receive from a card, such as cash back and rewards points.
That said, you can carry a balance on your credit card as long as you pay off the statement balance. That’s because no interest accrues on the current balance on a credit card until that month’s billing cycle ends.
Can you take out a credit card with a balance?
It is possible to take out a credit card with a balance. However, there are some things to keep in mind.
When you close a credit card, you will no longer be able to make purchases with the credit card and you will also lose transferable reward points. When you take out a credit card with a balance, you remain responsible for the balance and will continue to accrue interest on it as you receive billing statements.
If you are determined to close a credit card, it is better to pay off the current balance before doing so. This way you avoid late fees, interest charges and the possibility of the debt being collected if it is not resolved. If the card has no annual fee, it’s better to leave the account open and leave it for emergency use. If there is an annual fee, you may want to consider downgrading to a card with no annual fee.
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Another alternative to taking out a card with a balance is transferring the balance to an existing or new credit card. By transferring the balance on the card you want to take out, you avoid having to pay the balance all at once and you avoid interest costs for a promotional period.
Check out TPG’s best balance transfer credit cards to see how you can take advantage of great offers.
Related: The Best Way to Pay Credit Card Bills
Impact of closing a credit card with a balance
Taking out a credit card with a balance can hurt you in several ways, including negatively impacting your credit score and your overall credit report.
When you close a credit card, you shorten the length of your credit history and the average age of your accounts. The length of your credit history makes up 15% of your FICO score, so expect a dip when you take out a credit card.
Taking out a credit card with a balance also increases your credit utilization because it decreases your overall credit across all accounts. If closing a credit card puts your utilization above 30% of total available credit, you risk having your credit score negatively affected. If you close a card due to a history of late payments, know that such incidents will remain on your credit report for approximately seven years.
Taking out a credit card with a balance can also have long-term consequences for you if you don’t pay off the balance quickly. You will continue to receive billing statements for any balances you owe to the issuer.
If the balance remains unresolved for some time, the issuer may send it to a collection agency, which will be reported to the three credit bureaus, which will have a major negative impact on your credit score.
It is possible to take out a credit card with a balance. However, despite closing the account, you are still responsible for paying the balance and any associated late fees or interest charges. A better move is to pay off the entire balance on a credit card before closing the account.
If you can prevent a card from being closed by downgrading it to a card with no annual fee or moving the line of credit to another card from the same issuer, you may be able to protect your credit score and avoid having to deal with future interest charges or adverse effects. points on your credit report.
Related: Negative information on credit reports