Should I close high-balance card if offered a lower APR?
The high balance has likely hurt your credit score, and closing the card probably won't help for a while
Steve Bucci has been helping people decode and master personal finance issues for more than 20 years. He is the author of “Credit Management Kit For Dummies,” “Credit Repair Kit For Dummies,” “Barnes and Noble Debt Management,” co-author of “Managing Your Money All-In-One For Dummies” and “Debt Repair Kit For Dummies” (Australia). Steve is an experienced expert witness in identity theft, credit scoring and debt related cases. He has been a presenter at the FICO InterACT Global Conference, the Federal Reserve and the International Credit Symposium at Cambridge University in the UK.
I owe $29,000 on my credit card. I'm being offered a lower APR if I close the card, but how will that affect my credit?
The high balance on your card is likely to have already damaged your credit score. And closing the card and paying off its balance over time might not help your score recover for a while. But you could lower your APR and improve your score if you keep the card open and pay it off with a loan, or transfer its balance to a new card with a lower rate.
Dear Keeping Score,
I may be closing a credit card that has a limit of $29,600; my balance owed is $29,000. I am being offered a rate of 4.25 percent on my balance instead of the 26 percent I am paying. I can’t figure any other way out. I have other cards I pay on, too. How might this affect my credit score? – Joanne
Consider yourself lucky to be offered a lowered APR on your card balance as that doesn't happen every day! If your credit card issuer is offering you a reduction in interest rate if you close your account, that requires serious consideration, but only if you have exhausted other ways to pay off that balance first. For example, you could explore a 0 percent balance transfer deal or a debt consolidation loan, but there are a couple twists to each of these options. Let's explore all your choices:
Option No. 1 – Close the account and continue making payments at a lower APR: With your card close to 100 percent utilization, the damage to your credit score has already been done. While payment history is the most important factor in credit scoring, credit utilization is a very close second. And if you close a credit card that still has a balance on it, the card’s credit limit and balance will continue to count toward your credit utilization until you pay it off.
Nearly maxing out this card means that your score has already taken a very serious hit, which will continue until you significantly pay down your balance. So, closing the account and paying it off over time is not going to make much difference to your score at this point. The APR the card issuer is giving you is really good and way below the average of 17 percent. I would seriously consider this offer.
Option No. 2 – Transferring the balance to another card: You could also move your high balance over to a balance transfer credit card with a lower APR, but there are two things working against you. First, I highly doubt you will be approved for a low- or no-interest balance transfer card with a high enough limit to cover the amount of debt you want to move over. Plus, say you do qualify, you'll only have a year or so to pay off what you owe before the teaser rate expires. However, many cards that allow balance transfers charge a 3-5 percent fee to do so. So, you could be looking at an extra $1,450 on top of your existing debt. That means monthly payments nearing $2,500. And if you have other card payments on top of this one, well, you get the picture. While a balance transfer deal will help preserve your credit score, at this point your score should be the least of your worries. Getting your debt under control should be your priority.
Tip: What to do when your balance transfer is denied: If you were turned down because of poor credit, you may be able to reverse it by explaining any extenuating circumstances that led to negative items on your credit report. If it's due to a lack of available credit, you can request to transfer a smaller dollar amount.
Option No. 3 – Rolling all your card balances into a debt consolidation loan. While interest rates on debt consolidation loans will be higher than the 4.25 percent offered by your card issuer (anywhere from 11 to 25 percent, you'll have to shop around online), you may be able to move quite a bit of your high-interest card debts into one loan, depending on how much the lender qualifies you for. The beauty of a debt consolidation loan is that it comes with a fixed payment for a fixed period of time and other than a temporary hard inquiry hit to your credit score, this tactic could actually improve your credit score. How? By adding a new line of credit and allowing you to reduce or eliminate the balances on your cards. You also won't have to close your credit card unless your card issuer decides to close it anyway because you've mishandled it by maxing it out.
The downside to a debt consolidation loan is that you're turning an unsecured loan into one that is secured, which is always riskier for the borrower. Finding yourself in collections or even bankruptcy court is small potatoes compared to foreclosure! Defaulting on a secured loan can be life changing, especially if you lose your home and have to move involuntarily.
If you do choose a debt consolidation loan, it is imperative you put your credit cards on ice and don't use them during your repayment period. The last thing you want to do is add on more debt when you're trying to eliminate it.
Tip: Will my credit score improve if I pay off maxed-out cards over six to nine months? It's OK to stretch out the payments if you have favorable terms, such as 0 percent interest. But it's a bad trade if you need an excellent credit score for a new home or a car in the near future.
You could also contact a nonprofit credit counseling agency to get some budgeting help and ask about a debt management plan. Knowing for certain what you can afford as a monthly payment will clarify what your realistic options are. Should you opt for a debt management plan, your accounts would definitely be closed, but you can usually leave one card out for emergencies. You will pay off all your credit card debt at a low interest rate and do it in 60 months or less, if you qualify.
No matter what route you choose, I would advise you to make a plan based on what you can live with, rather than your credit score alone. As I always say, making all your payments on time, lowering overall debt as much as possible and applying for new credit only as needed is the only way to get and keep a great credit score. These are the steps that will lead you to a great credit score and, more importantly, be best for your financial wellbeing.
Remember to keep track of your score!