Close the card or take the hit?

August 14, 2009 11:10 AM

Should I reject a credit card's rate increase if I cannot pay off the balance right away?

I received a letter from a credit card company (Chase) saying that my interest rate would increase to a variable rate of prime + x%, but I could opt out of the increase if I were to close the card.

The letter also stated that I could continue to pay the balance off over time at the current rate, but I could not use the card any more.

I have no problem with closing the card, but I cannot afford to pay off the entire balance right now and would like to take advantage of paying the balance off over time, while keeping the current interest rate. I am, however, afraid that if we close the card, in six months the company will come back and say that they need the entire balance immediately.

Has anybody else done this - closed a card and kept paying it off over time? Has the bank ever asked for the entire balance due at one time? Am I better off taking the interest rate hit and leaving the card open?

I'm not worried about the FICO hit for closing the card, and I know it's bad to carry balances, but this one snuck up on me.

posted by dforemsky to work & money (13 comments total)

I'd close it, if I were you, given those circumstances.

If you have another card for emergencies, all the better. Otherwise, considering opening a new card quickly, before they report your card closed.

Finally, check your credit with the 3 services a month or so after the closing, to see what the company reported. If there's ***ANY*** inaccuracy, immediately send a certified letter stating the truth, and requiring the agency to correct their report. This is your legal right; the credit card company is unlikely to spend energy following up on such a trivial matter (to them), but it can affect your credit future.

Sorry to hear of your troubles, but it's time to face the music now. Protecting yourself will take a little effort. Don't put it off.
posted by IAmBroom at 11:19 AM on August 14

Oh - and DON'T USE THE NEW CARD except for emergencies!
posted by IAmBroom at 11:20 AM on August 14

A third option. Call them and try to get them to let you keep the old rate.
posted by amanda at 11:26 AM on August 14

I've closed a card that had a rate hike and took about 5 years to pay it off in full. (College. Free t-shirts. Don't judge.)

The only warning - DON'T USE IT. For anything. Even if you told them to close it, if you use the card in the interim, it reactivates it and the rate you rejected takes effect.
posted by ferociouskitty at 11:36 AM on August 14

The letter also stated that I could continue to pay the balance off over time at the current rate, but I could not use the card any more.

It sounds like they're saying you can do what you want to do. So...why don't you do it? Obviously you need to read the fine print of the deal, and make sure there's no easy way for them to screw you in a month, but it sounds like they're saying: you can continue to pay off the balance you have now under the terms that you accrued that balance, BUT if you do this you can't make any new purchases.

Sounds fair---I'd take them up on it. Just be sure to cut up the card so you don't use it accidentally, in case that triggers some sort of event that causes the entire balance to shift to a new interest rate. (I don't know if that's the case, but it wouldn't surprise me if it was.)

Just read the fine print carefully and make sure there aren't any time bombs hidden in there.
posted by Kadin2048 at 11:38 AM on August 14

There is a difference between "closing the card" and locking in the old rate and not using the card. I"ve not heard of a company coming back and asking for the balance, it would probably be illegal for them to do so.

Closing a card does not look good on your credit rating for a number of reasons, you really want to avoid that.

I would suggest locking in the rate, not using the card (cut it up to make sure). Also make sure any auto payments coming out of it are stopped.

And, as suggested, it doesn't hurt to call and request keeping the old rate, but the card companies are not very friendly right now...
posted by HuronBob at 11:39 AM on August 14

Actually, closing a card doesn't always look bad. If you have a million cards and you close some of them, it can look good because they don't fear that you have lots of unused credit that you could run up.
posted by Maias at 11:44 AM on August 14

I got the idea in my head about demanding the balance from this in the fine print:

"In addition, to the extent allowed by law, we may require you to pay the outstanding balance immediately or at any time after your account is closed."

I'm not sure of "to the extent allowed by law".

Thanks for all of the answers so far.
posted by dforemsky at 11:54 AM on August 14

If you plan on replacing the card and find one with an interest rate that is more favourable, there is nothing to stop you from paying off the outstanding balance with the new card, right? In effect it would just transfer the balance from one card to another.
posted by PercussivePaul at 12:06 PM on August 14

Impossible to answer without reading the fine print on whatever you signed when you got the card, but my experience of this exact situation is that they will simply close your account and continue to bill you in a normal manner under the prior terms. I've done this with a couple cards that tried to transition me into unacceptable terms over the last couple decades.
posted by nanojath at 12:43 PM on August 14

The amazing thing about this, of course, is that the banks are raising the rate on current balances! They are doing this while they can and before the new regulations on the credit card industry kick in which will make this illegal. I got my letter stating much the same as yours - except mine was from American Express (Blue).

The comment from nanojath above would normally make sense when talking about reading the "fine print" when you got the card, but one of the catch-all provisions in credit card terms (that will soon be illegal) is a broad sentence that they can change "any of the above terms, rates, etc. at any time, for any reason."

The decision on closing it should take into consideration how long you have had that particular card. The biggest FICO hit could come from losing age in your overall credit history. That's why it's important, in almost all cases, to keep your first credit card - or one you have had for a very long time - open for the aging issue alone.

Good luck!
posted by Gerard Sorme at 1:47 PM on August 14

As HuronBob says, there's a difference between closing it and not using it. You don't want to close it, as it will hurt your credit score. You do want to make sure "not using it" also extends to any automated payments you have set up or anything like that, as any sort of activity will trigger the rate increase.
posted by judith at 3:16 PM on August 14

I have done this, and as far as my own experience, the thing to watch for is the current expiration date on your card. If the card you have in hand expires in 6 months, that's when they could come and request the entire balance. Otherwise you should be fine just opting out and paying it down.
posted by kattyann at 9:03 PM on August 14