Just Closing A Credit Card Account Does Not Freeze Interest Rates, So “Opt Out” Instead

  Tens of millions of credit cardholders have   received notices that their interest rates are   being raised. Depending upon the company   and the account, credit cardholders are being   given between 15 and 90 days warning of pending interest rate increases. 

My last post discussed the option that credit cardholders have to exercise an ”opt out” provision.

Once chosen, the opt out provision freezes the account at the rate in place at the time of the opt out, and closes the account for all other purposes except repayment. (Note that the opt out provision must be chosen BEFORE the date on which the increase in interest rates takes effect.)

In this post I want to clarify and emphasize that there is a BIG difference between exercising the opt out provision (which freezes the rate and closes the account for everything but repayment) and simply choosing to close the account and then pay off the balance.

The first option will freeze your interest rates. The second option won’t.

WHEN NOT TO CLOSE AN ACCOUNT   

When a credit cardholder is hit with unfair and/or abrupt changes in terms, he tends to get angry. When a person gets angry he tends to act upon emotion instead of thinking things out.

It’s not uncommon for an angry credit card holder, who has gotten notice of an interest rate increase, to call up his lender and demand that his account be closed, even when he can’t pay it off.

Yet, closing an account like that is a mistake. It’s a rash action that will punish that credit cardholder with increased interest rates for as long as it takes him to pay off his balance.

JUST CLOSING DOES NOT STOP TERM CHANGES

Just closing a credit card account WILL NOT STOP an increase in interest rates from coming into effect.

When that that balance has not been paid off by the time the changes come into effect, it will automatically start collecting interest at the higher rates, even if the account is “in closing.”

In addition, should the credit cardholder be late with a payment, his APR may default to an even higher rate.

So the best way to hedge your bets, regardless of whether you are planning on closing your account either in the short or the long term, is to elect the “opt out” option.

Should you be able to pay off your balance before the changes in your terms come into effect, you can close your account then. (And if you do not, it will close automatically.)

However, should it take you longer to pay off the balance than you expected or should your plan to get a balance transfer not work out, you will have those lower interest rates for as long as you need them, and you will have protected yourself from the rate increase.

CLOSE PAID OUT ACCOUNTS YOURSELF

Also, although an account on which the opt out provision has been selected will close automatically once the balance reaches zero, that account may not close with the correct coding since a computer program will close it.

So, after the account is paid off and all balances are at zero, call in and close the account yourself. Then call back in a week to confirm the closing codes.

WHY YOU NEED TO CONFIRM CLOSING CODES 

It’s not uncommon for accounts that have been repaid in full and closed voluntarily to be coded as “charged off” or as a bad debt that was not repaid because a computer program does the coding. 

So you must call back and confirm that the closing has been coded as both “voluntary” and “paid in full.” If it has any other coding, you must get a human to change it. A credit card agent will be happy to make the correction after he looks at your repayment record and confirms that the coding is wrong.  

CHECK CREDIT SCORE IN THREE MONTHS 

Also, even when the coding is correct, be sure to check your credit report to be sure that the notes for that account confirm that it was “closed at customer request” and “paid in full.” (Note: expect there to be up to a three-month delay between the time you close your account and when that closing shows up on your credit report.) 

Should it say anything different, pull out your documentation and do whatever is necessary to get the record corrected because the wrong coding can negatively affect your future finances.

An account that has been incorrectly coded as “charged off” can prevent you from buying a car, refinancing your home, or getting a loan of any kind.  Note that American citizens and residents are entitled to free credit reports so that the cost of buying a credit report should not stop you from this important check.

SUMMARY

Never close a credit card account unless that account has a zero balance with no pending charges. When you carry a balance, and even when you are planning on paying the account off in the near future, choose the “opt out” provision instead, which will freeze your interest rates. 

Should you receive notice of an interest rate increase, you can escape that increase by selecting the “opt out” provision, provided that you select it prior to the date on which the new rates or terms go into effect.

When an account has been repaid and you want to close it, close the account yourself and call back in a week to confirm that the closing codes are correct.

Lastly, get a copy of your credit report in three months and double check that the closing registered correctly.