Friday, August 19, 2022

How To Cancel Credit Card Debt

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Is It Better To Let A Credit Card Expire Or To Close It

HOW TO CANCEL CREDIT CARD DEBT

Again, it depends on who you ask. If you ask the credit reporting systems, theyll say its always better to keep your credit card account open for as long as possible. Somehow , keeping your card open shows that youre responsible with credit. Go figure. And you probably wont be penalized if you let it expire. But heres the thing: If youre not going to use credit, what do you need the account for? Yep, if you ask us, its time to close that thing for good.

Contact Customer Service To Close The Account

Are you strong enough to say no? And should you?

After youve paid off your balance and used up your rewards, youre ready to close the account, which means contacting your credit card issuer.

Those companies dont like to lose customers especially good ones who pay their bills on time so dont expect them to give up easily.

The representative you speak to will likely try to convince you to stay by telling you that youre qualified for bonus rewards, qualify for a lower interest rate or can have your annual fee waived.

You can find the number for your credit card issuers customer service department by looking on the back of your credit card yet another reason not to cut up the plastic too early.

If youre canceling the card simply because of the annual fee, this potential offer could be enough of a reason to call your issuer.

But if youre absolutely certain you want to close the account, a couple of firm, Thanks, but no Im certain responses should shut them down.

Before you hang up, request written confirmation that the account is closed with a $0 balance. This helps prevent nasty surprise fees or damage to your credit score for non-payment. When you receive the letter, keep it in your files in case a debt collector tries to convince you years later that you owe on zombie debt.

If you dont receive the confirmation letter within a few weeks, send your own written cancellation letter.

My Unexpected Mistake And Its Consequences

I thought I did everything right.

I didn’t want to add to my debt while paying it down, so I didn’t use my card until I reached a $0 balance. But my bank marked the account “inactive” and terminated my credit line without notice.

My credit score dropped from “good” to “poor” overnight. How did I not know?

“If you have underutilized credit, meaning not putting anything on it for a perpetual basis, they can sometimes close those down,” explains Tim Maurer, a member of CNBC’s Financial Advisor Council. “That can actually hurt your credit report.”

That’s because of a metric called debt-to-credit ratio. It’s the amount of credit used compared to what is available. If what’s available drops, your ratio rises, thereby hurting your score.

My available credit was halved when my card closed.

“Inactivity is the most common reason for credit limit decreases,” says Ted Rossman, a credit card senior analyst at personal finance website Bankrate.We’ve seen this during past recessions as lenders get nervous customers won’t pay them back.”

In 2008, the Federal Reserve found that 20% of banks cut prime borrowers’ credit limits. It happened again during the pandemic, according to data from the Federal Reserve’s Senior Loan Officer Surveys.

I spoke with three customer service representatives to reopen my card. Each told me I’d have to reapply for a new card. With a “poor” credit score, I had less chance of approval.

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Requesting A Lower Rate

There are several things you can do to alleviate your credit card debt before it becomes an even larger burden. If you have a high interest rate that is making repayment difficult, one option to consider is requesting a lower rate from your lender. Credit card interest rates arent necessarily set in stone, so you may get a lower rate just by asking. A poll found that almost two-thirds of cardholders succeed this way.

If your financial situation has improved since you opened the card but your interest rate hasnt dropped, you may have a good case for a rate reduction. A history of regular use of the card and on-time payments also works in your favor.

Before you make the call, gather information that supports your request. Be sure the person youre speaking to has the authority to lower your rateyou may need to ask to speak with a supervisor. Finally, if your lender agrees to a lower rate, ask for confirmation in writing and the date you should expect to receive it.

Dont Cancel Credit Cards Because Youve Made Late Payments

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Never cancel a credit card with negative information, such as late payments or being in collections, thinking that it will disappear from your credit file. All credit accounts stay on your credit report for seven years from the date you became delinquent, even after you or a card issuer closes it. Accounts with only positive information remain in your credit file longer, for up to 10 years

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Debt Settlement Has Risks

Although a debt settlement company may be able to settle one or more of your debts, consider the risks associated with these programs before you sign up:

1. These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all of their debts settled. They drop out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.

2. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. So there is a chance that your debt settlement company will not be able to settle some of your debts even if you set aside the monthly amounts the program requires. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow.

Dispose Of Your Card Properly After Confirming Cancellation

After documenting the cancellation process and making sure that your credit report reflects the closed account, you are finally free to discard your credit card. There are a few ways to destroy your plastic or metal card, but youll need to pick a disposal method that leaves your information completely unrecoverable from identity thieves.

If you do decide to pick up the scissors, make sure that you are cutting each bit of information including your card number, CVV, expiration date and signature.

Although it may be worth temporarily holding off on closing a credit card if you are in the market for a new loan or mortgage, canceling a credit card shouldnt be a source of major concern for consumers with good credit, since the resulting impact on their credit scores is likely to be minimal and temporary.

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Lock But Don’t Close Your Credit Card Accounts

Debt reduction only works if you stop adding to the balance with new purchases. To avoid overspending or accumulating additional debt, you can request your account to be locked or frozen. This will keep your account open, but you won’t be able to use the card to make purchases until it is unlocked. This will help three key elements of your credit score:

  • Your the total amount of debt you owe divided by the amount of credit account limits you have open to you will stay low as you pay off your debts and keep your existing credit lines open.
  • Your average account age the average time you have had each of your credit lines open grows with every month you keep an account open.
  • Your credit mix how many different lines of credit you have open stays high when you have a diverse set of open credit accounts.

Make sure your paid-off accounts aren’t incurring fees for a zero balance, and then check your credit score: chances are it’s gone up and you now qualify for much better terms on future credit.

When You Cancel A Credit Card What Happens

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The link between you and the credit card company is severed when you cancel your credit card. A line of credit you were offered by the corporation, as well as all associated perks and privileges will be removed from your possession. Cutting a credit card in half isnt the only way to cancel it. To cancel your credit card, youll often need to complete the following:

  • Any outstanding debt should be paid in full.
  • Redeem all of your available prizes.
  • In order to cancel your credit card, you must first contact your bank.
  • Debt collectors will be less likely to contact you in the future if your account is clean. You dont want your reward points, miles, or cash back to go to waste when you close a rewards card. You should expect credit card agents to try to persuade you not to cancel your credit card when you phone them. Your cancellation request may be questioned, and you may be sent to the customer service department for further assistance. If you keep your credit card open, you may be rewarded with discounts or incentives.

    You can respectfully inform the customer service agents that you still wish to cancel your card. In the end, they will have to cancel the credit card. The only thing left to do is to destroy any duplicates of the canceled card that you may have.

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    Call Your Credit Card Company Bank Or Issuer

    Closing your credit card can be a breeze, but it can also be a bit tricky. Either way, its worth your time and effort to officially close the account. Be ready to stand your groundbecause credit card companies really dont want to lose your account.

    So, get out your phone and call your cards customer service. Let them know you and your are breaking up.

    A word of warning, though: The customer service rep wont let you off the hook easily. Theyve been trained for this momentand theyll do all they can to keep you on the line so they can try to change your mind.

    If thats the case, just stay calm and repeat, Im calling to close my account. And thats all you have to say! Not even another word. Listen, theyll say a lot of things to try to keep you from closing your account. But dont fall for these gimmicks:

    • Youll lose all your hard-earned reward points.
    • Your FICO score will never be the same.
    • No more cash back bonuses for you.

    Once they realize youre not picking up what theyre putting down, theyll probably try to win you over with some freebies like:

    • Well give you 5,000 airline miles.
    • What if we waive your annual fee?
    • How about no fees?

    Whatever you do, dont fall for it. Theyre not trying to shower you with gifts. Theyre trying to keep the thousands of dollars in revenue you represent because when they see you, they see dollar signs. So, be prepared. You might have to fight to close your credit card account.

    Ways To Consolidate Debt

  • Debt consolidation loan: These loans, usually from an online lender, credit union or bank, provide a large amount of money to pay off multiple debts, leaving you with one monthly debt payment.

  • Balance transfer credit card: This option transfers credit card debt to a balance transfer credit card that charges no interest for a promotional period, typically 12 to 18 months.

  • Home equity loan: If you own your home, you may be able to get a loan based on the equity in your home to pay off your other debts, but you risk losing your home if you dont keep up with payments.

  • Retirement account loan: If you have a savings or employer-sponsored retirement account, you could take out some of that money to pay off your debts. The downsides are less funds for your retirement, and if you cant repay the loan, youll owe penalties and taxes.

  • Debt management plan: This option combines several debts into a single monthly payment at a lower interest rate than most credit cards or loans, but it typically includes startup and monthly fees, and it often takes three to five years to repay the debt.

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    The Connection Between Credit Cards And Your Credit

    The only way to build credit is to have active credit accounts in your name and to use them responsibly over time. Thats where credit cards come into play.

    One of the biggest factors in how credit scores are calculated is called your . It only applies to revolving accounts, such as credit cards and lines of credit, which dont have a fixed term. Credit utilization isnt measured for installment loans, such as mortgages and car loans, because they do have a set ending or maturity date.Credit utilization is a simple formula that equals your total account balance divided by your total credit limit. For example, if you have a credit card with a balance of $1,000 and a credit limit of $2,000, your utilization ratio is 50% .

    Keeping a low utilization, such as below 20%, is optimal for good credit. So, by paying down your balance on the card to $400, you could reduce your utilization ratio to 20% and boost your credit scores.

    A low utilization ratio says that youre using credit responsibly. A high ratio indicates that you may be maxed out and even getting close to missing a payment.

    Many people mistakenly believe that getting rid of their credit cards will automatically improve their credit. The surprising truth is that canceling credit cards usually hurts it because your available credit on the card plunges to zero, which instantly increases your utilization and causes your credit scores to drop right away.

    What Are The Side Effects

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    The most common side effect of debt forgiveness is credit damage. In the case of credit card debt settlement, the negative remark will stay on your credit seven years. The negative item should drop off your credit seven years after the date of final discharge. You should check your credit every year to make sure old penalties drop off. Otherwise, you need to have them removed.

    The effect of the negative item in your credit report is a lower credit score. This may lead to rejected loan and credit applications i.e. lenders wont approve you for new credit. If you do get approved, you can expect to pay higher interest rates. This effect is only temporary. In fact, it wont even take seven years to get back to approvals at good interest rates. There are steps you can take to rebuild your credit once youve recovered and regained stability.

    Another potential effect of debt forgiveness is that it would also close your account if its still open. But as stated before, forgiveness is best used once your accounts are already in charge-off status or sold to collectors. So, this usually isnt a concern.

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    How Can You Ask For Credit Card Debt Forgiveness

    Here are five steps you may need to go through to request credit card debt forgiveness from a creditor or collection agency.

  • Save in advance. You generally have to be able to make a lump sum payment if you want a company to forgive a portion of your credit card debt.
  • Find out who owns the debt.Reviewing your credit reports may provide an answer to this question.
  • Make a call. Depending on who owns the debt , you can reach out to see if debt forgiveness is an option. If you have the capability, it might be a good idea to record the call. Just be sure to disclose that youre doing so. Every industry has shady characters, and the debt collection space is no exception. A recording could protect you if something goes wrong.
  • Ask if the creditor or collection agency will settle for less and forgive part of your debt. If a credit card issuer thinks it wont be able to collect your outstanding debt, it might be willing to listen to your proposal. A debt collector will usually entertain the idea of settling for less and forgiving part of your debt as well.
  • Get the offer in writing. If a creditor or debt collector agrees to settle your debt and forgive the remaining balance, get the offer in writing. Even if you record your settlement calls, a written settlement offer provides more protection in case a company tries to collect the remaining balance after you make your settlement payment.
  • Topic No 431 Canceled Debt Is It Taxable Or Not

    If you borrow money and are legally obligated to repay a fixed or determinable amount at a future date, you have a debt. You may be personally liable for a debt or may own a property that’s subject to a debt.

    If your debt is forgiven or discharged for less than the full amount you owe, the debt is considered canceled in the amount that you don’t have to pay. The law provides several exceptions, however, in which the amount you don’t have to pay isn’t canceled debt. These exceptions will be discussed later. Cancellation of a debt may occur if the creditor can’t collect, or gives up on collecting, the amount you’re obligated to pay. If you own property subject to a debt, cancellation of the debt also may occur because of a foreclosure, a repossession, a voluntary transfer of the property to the lender, abandonment of the property, or a mortgage modification.

    In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs. The canceled debt isn’t taxable, however, if the law specifically allows you to exclude it from gross income. These specific exclusions will be discussed later.

    The examples below show the difference between how recourse and nonrecourse debt is treated.

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