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Making minimum payments versus closing a card account

By  |  Published: December 10, 2016

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Question

Dear Credit Smart,
I am helping dad, who is medically ill, pay debts. There is a credit card with Chase that is delinquent. My two options are make three payments of $169 to bring the account current and then the minimum payment from there on. Balance is $5,000. Or I could have the card closed and divide the $5,000 by 60 months and pay it off. I don't think I can pay more than the minimum, and we do not need any credit, so is it best to let Chase close the account and then spread the payments over 60 months? What will that do to credit and other open lines my dad has?  – Rick

Answer

Dear Rick,
You are a good son to help your dad during this time. One thing you didn’t tell me was the interest rate on your dad’s card. Assuming a 20 percent interest rate, I used our credit card payoff calculator to see what it would tell me. Using those parameters, your monthly payment would be in the $130 to $135 range if you close the account. You may be thinking that $5,000 divided by 60 is only $83 and some change, and you would be correct. However, closing an account does not stop the interest from accruing. At the end of those 60 months, almost $3,000 in interest will have been paid, on top of the $5,000 balance.

The other option is to pay $169 over the next three months and bring the account current, which would be $30 to $35 more than the payments to pay off the card. At that point, your minimums would likely decrease to $125 or so and would continue to go down each month if no new charges are made. Using our minimum payment calculator, you will see that it would take more than 21 years to pay off the card this way. The interest alone paid over that time would be more than $8,000, again assuming that no more charges are ever made on this card. This information is posted on the monthly statements and will be more accurate since all of the information is correct there. No matter what, a lot of money will be paid in interest if the account stays open and only the minimums are paid.

You bring up a valid point regarding what closing the account will do to your dad’s credit score. Closing the account may cause a temporary drop in score because the amount of available credit will be reduced, which is a factor in the credit scoring models. However, because the account is delinquent some damage has probably already been done to your dad’s credit score. Making consistent on-time payments is far more important to credit scores and delinquency causes more damage. So closing the account may not make much difference one way or the other.

As for your dad’s other credit lines, you should know that his other creditors do have access to his information. The best thing moving forward will be to make consistent, on-time payments on all of the accounts. This is the best way to demonstrate responsible credit behavior to his other creditors.

Remember to always use your credit smarts!

See related: Credit utilization: How this key scoring factor worksClosed accounts affect your credit score, but maybe not how you think

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Updated: 08-18-2017

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