Is Cancelling Credit Cards Really Bad for Your Credit?

[Robert Maxwell]

If anyone has any other questions about credit and debt, I'd be happy to answer them. Most people don't seem to know much about how credit really works, or what their rights are. I've been around the block and I've also worked in the collection industry (don't kill me!)

I know someone who was irresponsible with credit a few years ago. As a result, a card with a $400 limit and something like $300 of debt on it went unpaid and was eventually charged off.

Since then, various collection agencies have been trying to collect. This person is eager to clean the slate and would take an opportunity to pay off the debt, but the agencies now want upwards of $1000 and that is not going to happen on principal.

Some months ago one of the agencies offered to clear the debt for the original amount, but at the time the person in question did not have the available funds and so the offer went disregarded.

What would the best course of action be in this case?

A few things to consider.

1. How long ago was this debt incurred? When was the last time it was serviced? (Meaning, a payment or promise to pay was made.) If it was quite a while ago, look into the statute of limitations for your state. It might be worthwhile just to wait it out. After a certain point, the debt is legally uncollectable. It can continue to show up on your credit report, though.

2. If your friend wants to pay up instead, have them contact the creditor currently holding the debt. This can be found out by running a credit report and looking to see what company is named (since the debt may have changed hands in the meantime.) You do not want to deal with third-party collection agencies. They have no legal authority over you and are generally not authorized to settle. You have to talk to the creditor. Call with a settlement amount in mind, close to the principal, maybe a little less, but ask them what it would take to settle. If it's more than the original credit limit, talk them down. Tell them you've got a one-time offer to pay off this debt and you have the cash on hand to do it right now, in exchange for marking the debt "paid as agreed" on your report and having it closed out for good. If the person you get says they can't do it, ask for a supervisor or someone else who can.

Odds are, they will take a settlement if the alternative is to take nothing. If the account was charged off some time ago then they should be more flexible. But it's important that you get the right person. It doesn't hurt to call more than once. If the first person you get won't settle, call again and try to get someone else. Never underestimate the human element. If you do settle, make sure you get it in writing!

 

[Lindley]

"Paid as agreed" is the key phrase there for making it stop being a problem on the credit report?

I know this particular debt shows up twice on the report, once under the original bank marked as "charged off as bad debt" and again under the current owner. Will the current creditor marking it Paid as Agreed also remove the "charged off" reference, or not?

 

[Robert Maxwell]

"Paid as agreed" is the key phrase there for making it stop being a problem on the credit report?

I know this particular debt shows up twice on the report, once under the original bank marked as "charged off as bad debt" and again under the current owner. Will the current creditor marking it Paid as Agreed also remove the "charged off" reference, or not?

Correct! If they don't update the credit report, it doesn't really do any good.

It is not permitted to report the same debt twice on your credit report, though. Once it is paid in full and marked as such on the credit report, it shouldn't matter if it was charged off at some point in the past. In fact, the creditor should be able to clear off any bad marks associated with it as part of the settlement. If not, dispute it! Here is the FTC's advice on disputing credit report items.

Likewise, if the debt truly is reported twice as though it's two separate debts, dispute it.

 

[Ro_Laren]

Keep in mind that even a card with $0 balance may incur an annual fee if there is one for the card.

Even though my boss was wondering about cancelling credit cards, I was wondering as well. I have a frequent flier mile credit card that has a $85 annual fee. Well, I move overseas at the end of the month (for at least 10 months) and found a different credit card with significantly lower fees & no annual fee. I will be using the other credit card while I'm overseas. So, should I keep my frequent flier mile credit card & pay the $85 annual fee for a card that I won't use for at least 10 months or should I cancel the card? Sure, I'll be back in the US at the end of 10 months & in an ideal world would like to start using the frequent flier mile credit card to accrue more miles. When I come back, I will potentially be doing some travelling around the US, but plans are somewhat up in the air. I definitely won't be making big purchases 'cause I'm poor. & I plan on going back overseas again. My future will consist of lots of back and forth between the US and overseas, but while I'm overseas I'm always planning on using my other credit card (the one without the annual fee & expensive foreign transaction fees).

Should I keep paying $85 each year when I potentially won't use the card for extended periods of time? Or, should I go ahead and cancel the card and try to earn my frequent flier miles another way? & of course, will it hurt my credit to cancel the card?

 

[Lindley]

IMO, you should always avoid annual fees when possible. Your credit score probably won't be dinged enough to be worth worrying about.

And do you use frequent flier miles enough to save over $85 a year in the first place?

 

[Robert Maxwell]

Annual fees suck and if you have good credit you shouldn't have to put up with them at all.

 

[Ro_Laren]

IMO, you should always avoid annual fees when possible. Your credit score probably won't be dinged enough to be worth worrying about.

And do you use frequent flier miles enough to save over $85 a year in the first place?

^ I first got this credit card because they were offering 30,000 (or 35k) miles if you opened the card and spent $x in x amount of months (I don't quite remember the details). There was no annual fee for the first year. So, this card obviously gave me a large number of miles. Since then I try use this card vs. other cards.


With this airline, if you are lucky (i.e. book far enough in advance), you can get one-way domestic tickets for 12,500 miles or a one-way flight to Europe for 20,000 miles. Of course, $85 is cheaper then most domestic tickets and always cheaper than a flight to Europe. The key is to spend enough money to make it worth it. Basically the airline gives you 1 mile (or 1.2 miles or 1.4 miles- I forget 'cause it changed) for every dollar spent, so that means it would potentially take a while to get enough miles to travel. But, you can also get miles for shopping through the airline's web-site or for flying with them when you purchase the ticket (of course you can do both of these things without the credit card).

So considering that my future will consist of a lot of back and forth between countries, but I'm gonna be poor at the same time, I have to figure out whether the credit card is worth it.... I'm obviously having a hard time deciding.

 

[Ro_Laren]

Annual fees suck and if you have good credit you shouldn't have to put up with them at all.

Unfortunately a lot of the frequent flier mile credit cards have annual fees.

 

[Timby]

Frequent flier mile credit cards are one of the biggest scams in recent history. The commercial with Alec Baldwin saying "Oh, but there are no seats available for 25,000 miles" isn't terribly inaccurate. It took three years, of several different people flying all over the country many times a year, plus company credit card use, for my organization to earn a pair of vouchers for my upcoming round trip to Las Vegas. In economy class.

 

[RoJoHen]

Does debt consolidation/refinancing affect your credit score at all? I really need to look into consolidating my student loans, which are currently my biggest hurdle in my epic struggle to reduce my debt-to-income ratio.

 

[Robert Maxwell]

Does debt consolidation/refinancing affect your credit score at all? I really need to look into consolidating my student loans, which are currently my biggest hurdle in my epic struggle to reduce my debt-to-income ratio.

Refinancing might cost you a few points when they do a hard inquiry, which will be necessary for them to approve the loan.

Consolidating student loans is very common and shouldn't hurt you. I don't believe it's looked upon the same way consolidating credit cards debts is (read: very poorly.) So I would say go for it.

 

[farmkid]

Does debt consolidation/refinancing affect your credit score at all? I really need to look into consolidating my student loans, which are currently my biggest hurdle in my epic struggle to reduce my debt-to-income ratio.

If it has any effect at all, I would think it would help. You would then have just one open account on your credit report, rather than many. In my own case, I don't have a lot of student loan debt, but I did get it from two different sources (one for each of two different universities). I consolidated my loans, but for some reason I still don't quite understand, I could only consolidate my loans from one lender and not the other. I now have one loan on my report for all my years in graduate school and several for my undergraduate years. Those several are a bunch of small loans, averaging maybe $1500 each, one for each semester I borrowed any money.

 

[RoJoHen]

Those several are a bunch of small loans, averaging maybe $1500 each, one for each semester I borrowed any money.

I'm in this situation, too, on my college was on tri-mesters, so I have about 12 loans. I also have another student loan from my bank. My mortgage lady looked up my credit and was like, "Why do you have 13 different student loans?" I had no idea my lender had them broken down in such a way.

 

[Timby]

I had no idea my lender had them broken down in such a way.

It's odd, but it's not uncommon; banks will often restructure loans to younger people to make their own balance sheets look better (instead of "person A has a $130,000 loan out with us," it's "we have a bunch of smaller loans that are secured").