Credit card cancellation consequences?

January 22, 2008 8:14 AM

Posting for a friend: My friend was bad about paying bills on time for a credit card over a long period of time (multiple years). It's one of the major blemishes on their credit score right now and the issuer has just decided to cancel their card. The question is, how much will the issuer canceling the credit card be on my friend's credit score, and what can they do?

Is it worth trying to negotiate and see if the card can be reinstated at a much higher rate? The friend easily has enough money to pay it but has just been disorganized. And if the card is canceled by the issuer, how long will this leave a blemish on my friend's credit score?

The only information I can find about canceled credit cards on the web is about people canceling their own card, not the issuer, except for this AskMe question, which doesn't talk about how much it hurts one's credit score if this happens, or how long it affects it, or what one can try to do (like can one negotiate for a higher rate)?

posted by Eldritch to work & money (4 comments total)

Your friend should get a copy of their credit report and learn the ins and outs of how their credit score is calculated. It is not difficult to do. The only way to understand one's credit score is to see the numbers laid out in front of you. Your friend needs to get over their fear of their own finances, assume responsibility for repairing their credit score, and look at the numbers laid out in detail on their credit report.

You say your friend has the money to pay the balance. Why don't they just pay off the card? This would go a much longer way in any sort of negotiations with a credit card company, though why your friend would want to pay a higher interest rate when they're already in financial trouble is an important question. Your friend might do better in the short term to do without a credit card, at least until they see for themselves how credit works by viewing their credit report.

Disorganization is no excuse to a credit card company, as your friend is figuring out the hard way.
posted by TryTheTilapia at 8:46 AM on January 22

First of all, the closed by issuer and the late payments will stay on their credit report for 7 years. I don't know if the lender will reconsider, but it wouldn't hurt to try. You can ask if they can keep the card, but drop the credit limit to something very low (say $500).

The effect on the credit score is not something that can be defined precisely like it will be a 500 point drop. The exact formula used by FICO is not known. I believe that the canceled card could have two negative effects on their score. The first is that there may be some penalty for the "canceled by issuer" result and the second is that their utilization percentage (ratio of balance to limit on CCs) will get worse and that is a major factor in the scores. It seems clear that recent lates have more impact than older lates, so the first order of business is to get their act together on timely payments.

You can find more information than you can stand at Creditboards, which is the definitive source for information on your credit and various techniques to improve it (some of it is of a dubious ethical nature).
posted by Lame_username at 9:14 AM on January 22

You say that he has money to pay the card -- do you mean enough to make his monthly payments, or more?

If he can send them a check for a significant percentage of the total balance, he'll be in a good position to negotiate with them.

Worth avoiding having a issuer-canceled card on the credit report dogging the score for seven years.
posted by desuetude at 9:23 AM on January 22

Your friend's credit score will be adversely affected by the late payments, the account being "closed by credit grantor," and the reduction of available credit. At this point I would probably just try to payoff whatever balance remains and let the credit card company keep their steep rate. I don't see the point in trying to negotiate a higher rate.
posted by curlyelk at 12:15 PM on January 22